Owning property gives you multiple benefits. If you use your property as a residential property it will give you the feeling of peace with proud as you are living in your own home. If you make your property a commercial one, it will turn into a permanent source of income. Well, these are not the only benefits of having property. Your property can be used as loan collateral too. During an urgent need of money, one can avail a loan against property which is much cheaper than unsecured loans.
A loan against property is a secured loan which is backed by the borrower’s property. While availing the loan, the borrower has to provide the mother deed and the sale deed of the property to the lender which will be in lenders custody till the loan is repaid in full. Meanwhile, the borrower can use the property as it was used before the loan was availed. The eligibility of a loan against property includes the repayment capacity and the credit score.
A loan against property is a much pocket-friendly way to avail a multipurpose loan but one must not forget the fact that you are putting your priced property in danger of being liquefied. Being unable to pay the EMIs on time for a few consecutive months may make the lender sell your property to refund the loan which was given to you. So one must not ignore the risk factor which is associated with a loan against property.
As it is seen that a loan against property is a cheaper but a risk associated way of availing a loan, a loan seeker must be careful while applying for the same. In this article, a few points are brought in focus to keep in mind while availing a loan against property.
Points to Consider While Availing a Loan Against Property (LAP)
The interest rate on a loan against property ranges from 9-14%. The rate of interest can differ from lender to lender. One has to spend some quality time to find the lender who is ready to provide a loan against your property at a low cost. Moreover, if you are trying to avail a loan against the property for buying a new home or pursuing education for you or your children, then remember that a home loan or an education loan is cheaper than a loan against property. One should opt for a loan against property only when it is the cheapest option available to you.
The principal amount which you will get as a LAP depends on the market value of the property. Generally, one can get 40% and 70% of your property’s market value as a loan. The loan amount may vary from lender to lender for the same property. So one has to check with many lenders to find the highest possible loan amount. Moreover, if you feel that the amount which you are getting is not sufficient to fulfil your need than it is not justified to put a risk on your priced property.
The loan tenure of a loan against property can be as long as 15 years. The longer tenure makes the EMI amount smaller which increases the loan affordability. But at the same time, one should understand the fact that a longer tenure increases the cost of borrowing. Longer the tenure more will be the total outgo of the loan as the interest on the loan is calculated on a compounded way.
The Processing and Penalty Charges
A loan against property comes at a processing charge of is 0.50% to 3% of the loan amount plus service tax. A loan borrower does not need to give the processing fee and the service tax as it is deducted from the principal amount. Some lenders even impose a prepayment charge of 2% of the total outstanding amount or sometimes more. Not only the mentioned ones but a LAP borrower also has to pay the stamp duty and other statutory charges are applicable as per state laws. So considering all those facts, while calculating the loan cost, one has to add all those fee and charges to find the actual amount which he/she is paying to avail the loan. Those additional charges can bring significant change in the cost of borrowing.
No Tax Benefits
If you avail a home loan or an education loan, you can avail a tax benefit under section 24b and 80c. But unfortunately, a loan against property do not attract any tax benefit for the borrower. The amount which you use in repaying your loan will be considered as your taxable income and you are to pay tax on the same according to your tax slab. Hence, a home loan or an education loan is more preferable than a loan against property.