When faced with a financial emergency, many people turn to obtaining a loan as their first solution. Loans provide immediate access to funds, allowing individuals to meet their needs quickly. However, with the plethora of loan options available in the market, selecting the most suitable loan can often pose a challenge.While certain loans like home loans, car loans, and business loans serve specific purposes, they may not necessarily address immediate financial needs or urgent monetary requirements.
In such situations, individuals can consider opting for a multi-purpose loan, such as a personal loan or a loan against property. A personal loan is unsecured, whereas a loan against property is secured.In this article, we will explore the idea of taking out a loan against property and the advantages it offers. Let us first define what a loan against property entails.
What Is A Loan Against Property?
A loan against property is a secured form of lending where the lender provides funds to the borrower by using a property owned by the borrower as collateral. The property can include land, a residential property, or a commercial property.It is important to clarify that the borrower maintains ownership of the property that is being used as collateral. The property is simply held by the lender as security until the loan amount is fully repaid.This type of loan provides more flexibility than unsecured personal loans as there are no restrictions on how the funds can be used. Borrowers can utilize the funds for various purposes such as medical emergencies, education expenses, or home renovations.
Should You Choose A Loan Against Property?
When considering obtaining a multi-purpose loan, individuals are presented with two options: a personal loan or a loan against property. While each option has its own advantages and disadvantages, a loan against property is often more beneficial when seeking a substantial amount of financing. It is important to understand the key features of LAP that make it a preferable choice:
LAPs are secured loans
As previously stated, LAPs are classified as secured loans, requiring borrowers to provide their self-owned property as collateral to secure the loan. While initially seen as a burden or risk, this arrangement offers easy eligibility and lower interest rates for accessing financial assistance.
No transfer of ownership
While it is necessary to pledge your own property in order to secure a Loan Against Property (LAP), there is no actual transfer of ownership of the mortgaged property. You will retain full ownership of your property, with the lender holding it as collateral until the loan is fully repaid.
They come with lower interest rates
The distinct advantage of LAP is that it offers lower interest rates compared to unsecured loans like personal loans. This can result in reduced EMIs and alleviate financial burden. Typically, LAP interest rates range from 8 to 15 percent per annum on a reducing basis, making it a more favorable choice.
There are no restrictions on their end usage
LAPs, or Loan Against Property, are versatile in nature as they do not have any specific restrictions on how the funds can be used. Borrowers have the flexibility to utilize the loan amount for a wide range of purposes, including home renovations, education expenses, vacations, medical emergencies, and large purchases.
Get access to a high loan amount
Through LAP, individuals have the opportunity to access a substantial loan amount ranging from 70 to 80 percent of their property’s market value. Upon submitting an application for a loan against property, a designated representative from the lender will conduct a thorough assessment of the property to determine its current market value. The loan amount extended to the borrower is then calculated based on the valuation provided by the official assigned by the lender.
Repay in convenient tenure
By opting for a Loan Against Property (LAP), borrowers have the opportunity to access a significant loan amount and the flexibility to repay it over an extended period. Generally, lenders offer LAPs with repayment tenures ranging from 15 to 20 years. This allows borrowers to select a loan tenure that aligns with their individual preferences and financial capacity.
Easy eligibility criteria and documentation
Loan Against Property (LAP) typically has straightforward eligibility requirements and minimal documentation due to being a secured loan. This is because lenders face less risk when providing LAPs compared to unsecured loans like personal loans, which often have stricter criteria and verification processes. To qualify for a LAP, applicants must own a residential or commercial property and meet other basic criteria such as age, income, and credit score.When applying for a LAP, it is important to consider the following factors:- The value and type of property being offered as collateral- Interest rates and repayment terms offered by different lenders- Loan-to-value ratio and maximum loan amount available- Processing fees and other associated costs- The impact of taking on additional debt on your financial situation- Potential risks and consequences of defaulting on loan repaymentsBy carefully evaluating these factors and conducting thorough research, borrowers can make informed decisions when applying for a LAP. It is recommended to seek advice from financial professionals or lenders to ensure the best possible outcome for your loan against property application.
- Loan Amount : When considering taking out a Loan Against Property (LAP), it is important to carefully assess your financial needs to determine the appropriate loan amount. Borrowing more than necessary can lead to higher monthly EMIs.
- Rate of Interest : The interest rates for LAP can vary between lenders, so it is advisable to compare rates from different institutions before applying for a loan. Typically, non-banking financial companies (NBFCs) offer lower interest rates compared to traditional banks.
- The loan to value ratio (LTV) of your Loan Against Property (LAP) will determine the maximum loan amount you can borrow from a lender based on the current market value of the property you plan to use as collateral.
- Loan tenure and EMIs : It is important to carefully consider the loan tenure when selecting your LAP. Opting for a shorter tenure will result in higher EMIs, potentially causing financial strain each month. Conversely, choosing a longer tenure will result in paying more interest over time. It is advisable to strike a balance between the loan tenure and EMIs to ensure a manageable repayment plan.
Tax benefits on LAP
According to section 24 of the Income Tax Act of 1961, individuals can claim tax deductions of up to Rs. 2 lakhs by utilizing a Loan Against Property (LAP) for the purpose of purchasing or constructing a house. These tax deductions can be applied to the interest portion of the LAP.In conclusion, LAPs present advantages over unsecured loans, allowing individuals to fulfill various financial needs with ease. However, it is important to consider the factors influencing LAPs before making a decision, as defaulting on the loan could result in losing the mortgaged property.Therefore, it is advised to opt for a loan against property only if confident about timely repayment. For those seeking a less risky financial option, a personal loan may be a suitable alternative.With a good credit history, individuals can access a range of loan products, such as personal loans, home loans, and loans against property. Visit our website to explore and select the most suitable financing option for your needs.