Whenever we face a financial emergency, the first thing that comes to our mind is applying for a loan. By taking a loan from a lender, we can access urgent finances and meet our requirements. However, choosing the right loan for our needs can sometimes become an arduous task with several types of loans available in the market.
While loans like home loans, car loans, business loans, etc., are meant to provide financing for specific purposes, they cannot help you tackle a financial emergency or an urgent monetary requirement. In such cases, you can avail of a multi-purpose loan, such as a personal loan or a loan against property. A personal loan is an unsecured loan, whereas a loan against property is secured.
In this article, we will discuss whether it’s a good idea to opt for a loan against property and the benefits of doing so. First, let’s tell you what a loan against property is.
What is a loan against property?
A loan against property is a secured loan that the lender disburses after keeping a legally owned property of the borrower as security or collateral. It can be a piece of land, a self-occupied or rented house, or self-owned commercial premises.
It needs to be noted here that the borrower remains the rightful owner of the mortgaged property. It only remains as collateral with the lender until they have repaid the entire loan amount.
A loan against property can be a good alternative to unsecured personal loans since it has no end-use restriction. It means that it can be used for any purpose, ranging from tackling a medical emergency to paying for higher education to renovating a home.
Should you choose a loan against property?
When it comes to getting a multi-purpose loan, you have two choices – a personal loan or a loan against property. While both have some merits and demerits, the latter can be more useful when you need a high amount of financing. Let’s look at some essential features of LAP that make it a better choice:
- LAPs are secured loans
We’ve already mentioned before in this article that LAPs are categorised as secured loans. It means that you’re required to pledge your self-owned property as security or collateral to avail of a loan against property.
Though this may seem like a burden or risk at first, it allows you to avail of finances with easy eligibility and lower interest rates.
- No transfer of ownership
Though you’re required to pledge your self-owned property to avail of a LAP, no transfer of ownership of the mortgaged property takes place. You remain the rightful owner of your property, and the lender will only keep it as collateral until you’ve repaid the entire loan amount.
- They come with lower interest rates
This is a distinct advantage that makes LAP a better choice. Since LAPs are secured loans, they come with lower interest rates as compared to unsecured loans such as personal loans. The lower interest rates can help you reduce your EMIs and hence, there will be less financial burden on you. Usually, LAP interest rates range between 8 to 15 percent per annum on a reducing basis.
- There are no restrictions on their end usage
LAPs are multi-purpose loans, which means that they have no end-use restrictions. You can borrow a loan against property and use it for a variety of purposes, such as paying for your house renovation, funding your child’s higher education, planning a family vacation, tackling a medical emergency, and making big-ticket purchases.
- Get access to a high loan amount
With LAP, you can avail of a high-value loan of up to 70 to 80 per cent of your property’s market value. When you apply for a loan against property, the lender assigns an official to inspect your property and estimate its current market value. Based on the official estimates, your loan amount is determined by the lender.
- Repay in convenient tenure
Since you can borrow a high loan amount through LAP, you also get the option to repay your loan in a long tenure. Usually, the lenders provide LAPs with a tenure of up to 15 to 20 years.You can choose your loan tenure as per your convenience and repayment capability.
- Easy eligibility criteria and documentation
LAPs usually come with easy eligibility criteria and simple documentation. It’s because they are secured loans and lenders don’t have to take a lot of risks for providing these loans. On the other hand, unsecured loans such as personal loans involve strict eligibility criteria and lengthy verification.
To qualify for a LAP, all you need to have is a self-owned residential or commercial property apart from fulfilling some other basic requirements, such as a minimum age, income, credit score, etc.
Factors that you should consider while applying for LAP
Now that you know the features and benefits of availing of a loan against property, let’s talk about the factors that you should keep in your mind while applying for it:
- Loan amount
You can borrow a high amount of loan with LAP. However, it’s crucial to borrow only as per your requirements. Unnecessarily borrowing a high amount than what is required will needlessly increase your monthly EMIs.
- Rate of interest
The rate of interest levied on your LAP may vary from one lender to another. So, you should compare LAP interest rates offered by various lenders before applying for a loan against property. Generally, NBFCs offer lower interest rates as compared to traditional banks.
- Loan to value ratio
The loan to value ratio of your LAP will determine the loan amount that you can borrow from a lender. It is the ratio of the maximum loan amount that you can borrow upon the current market value of the property that you’re planning to keep as collateral.
- Loan tenure and EMIs
You need to choose your LAP loan tenure carefully. If you opt for a short tenure, your EMIs will go up and you may find it difficult to pay every month. On the other hand, if you opt for a longer tenure, you may have to pay a large amount of interest. So, try to find a balance between the loan tenure and EMIs.
- Tax benefits on LAP
Under section 24 of the Income Tax Act of 1961, you can avail of tax deductions of up to Rs. 2 lakhs by availing of a LAP and using it to buy or build your house. You can apply for these tax deductions against the interest component of your LAP.
The final words
So, these are the features that make LAPs a better choice than unsecured loans. You can avail of a loan against property and tackle your different financial requirements without any hassles. However, it’s crucial to keep the factors affectingon LAP in your mind while making a decision. If you default on your loan, you can lose your property to the lender.
Hence, it’s better to borrow a loan against property only if you are convinced that you can repay it in time. If you want to go for a less risky financing option, you can opt for a personal loan.
With Poonawalla Fincorp, you can avail of a gamut of loans, including personal loan, home loan, and loan against property. Browse through our website and choose the right financing option for yourself.