A loan against property, also known as LAP, is a popular loan product as it is secured in nature. Housing finance companies (HFCs), banks, and non-bank financial institutions (NBFCs) offer these loans against residential or commercial properties and typically at a lower interest rate than the interest rate charged on personal loans or business loans. Further, LAPs are disbursed within a reasonable time frame, which makes them even more popular. Anyone who has a pre-owned property can avail of a loan against property. The quantum of loan sanctioned in a loan against property is generally higher than what one may be offered through other available options.
The demand for loans against property has been on the rise primarily due to the following reasons:
- These loans are cheaper than personal loans.
- The applicants can continue occupying their property even after they have availed of a loan on it.
- The loan fund can be used for any purpose, including paying for medical emergencies, children’s higher education, marriage, setting up a new business or expanding an existing one.
Further, existing bank customers are not required to go through the process of document verification again, which makes the whole process of availing a loan against property far easier.
If you are planning to opt for loan against property, avoid the following:
#1 Not Comparing Interest Rates
Some applicants make the error of borrowing loans against property without prior research. The loan against property interest rate begins at approximately 8.4% and can go as high as 14.5%. The LAP interest rates vary based on the property and borrower’s credit profile. Thus, it is of utmost importance that a person compares the interest rates being offered by different banks before accepting any offer.
A borrower’s credit score and income are taken into consideration while sanctioning a loan against property. This means that borrowers with a stable and sufficient income are more likely to get better interest rates on a loan against property. Having a consistent flow of income indicates that one is capable of timely repayments. So, if your credit score is between 750 and 800, your chance of a loan against property approval is quite high. The best way forward is to compare offers from lenders and then, settle on the lowest interest rate.
#2 Not Knowing the Processing Fee
Most lenders charge about 1% of the loan amount as a processing fee. However, if the applicant researches a little, they will realize that lenders also cap the maximum processing fees they charge. For instance, many reputed banks charge 1% as a processing fee for a loan against property. However, they also have a rule that this 1% must not exceed Rs.50,000. Then other lenders have set the cap at Rs.1.5 lakh. The borrower must make himself aware of this cap before making any final decisions.
#3 Not Checking the Loan Tenor
When taking a loan against property, opting for a shorter tenor is always a good idea. This is because it saves the total loan interest outgo. Most lenders offer a loan against property for 15 to 20 years. A higher tenor, quite naturally, means a lower EMI. However, it also means higher interest outgo. A borrower must, therefore, think hard and try to strike a balance between right tenor and right EMIs.
#4 Not Being Aware of the Disbursal time
Disbursal of a loan against property takes two to three weeks as lenders need some time to verify all property-related documents. They also need time to evaluate the market value of a property before approving the loan against the property application. Thus, when borrowers need a huge amount of money urgently, then the loan against property is not the most appropriate solution. For faster disbursals, these borrowers can consider a personal loan or other options which are likely to have a shorter processing time.
#5 Falling Prey to Marketing Gimmicks
It is common for loans against property agents to tempt customers by quoting a lower LAP interest rate in India. However, the final interest rate usually comes out to be higher than the interest rate quoted by agents. So, it is a good idea to apply for a loan with only authorized representatives as they give the right rates. Ideally, borrowers must consider this before giving documents for processing.
Remember that LAPs are generally big-ticket loans. So, the processing charges are often significantly high. A loan against property availed of on floating interest rates is unlikely to attract prepayment charges. Experts suggest that borrowers must select a tenor based on their repayment capacity.
The Final Word
To sum up, a loan against property generally offers lower interest rates, greater flexibility, a higher loan amount, a longer repayment tenor, and no restrictions in terms of end-use. While the long-term advantages of this type of loan make it a much better option than personal loans, it is important to remember that if the applicant defaults on repayments, their right over the property gets transferred to the lender. So, the borrower must be extra careful and check his loan eligibility using a loan against property EMI calculator before making an application.