Loan against property can cut interest costs

Generally, people accumulate assets to cocoon themselves in the safety net of financial security. However, when a sudden need for funds arises and they need to borrow from a bank, they often neglect to utilise their assets to reduce the expense of their credit.

Right from education needs for your children to financing a business, the first thing that would come to mind is, ‘Where would I get the money from?’

One of the options available is taking a loan. You could take a personal loan for the amount required, or you could take a loan against your property.

What is a loan against property?
A loan against property (LAP) is exactly what the name implies — a loan given or disbursed against the mortgage of property. The loan is given as a certain percentage of the property’s market value, usually around 40-60%. Loan against property belongs to the secured loan category where the borrower provides a guarantee by using his property as security.

The borrower can either opt for an overdraft option where he is required to pay interest only on the amount withdrawn or a lumpsum loan amount. The disadvantage of an overdraft facility is that the interest rate charged may be higher, in some cases up to 0.5% and also annual processing fees will be charged.

Besides, if you want the overdraft facility, you have to take the loan only from a bank as other financial institutions do not offer a saving/current account. In case of a lumpsum loan, processing fees are charged only once when the loan is taken and also the individual can approach either a bank or financial institution for the loan.

What purposes can I take a loan against property for?
Loan against property can be taken for expanding your business, getting your son/daughter married, sending your son/daughter for higher studies abroad and funding medical treatments.

How is LAP suitable?
Long-tenure loans: For individuals requiring funding for a long period of time, LAP can come very handy because the tenure of these loans can be a maximum period of 15 years.

Large loan amount: Individuals requiring substantial funds also should consider this loan option as a large loan is possible. Of course, it depends on the property value. There is no restriction as in case of personal loans where the maximum loan permissible is Rs10 lakh.

Lower rate of interest: On account of the security provided in terms of the house, the rate of interest charged by banks tends to be much lower than personal loans.

What kind of properties can I mortgage for a loan?
You can normally take a loan against your self-occupied or rented residential property. This could be a house or even a piece of land.

What are the eligibility criteria to get a loan against property?
These criteria will vary from one bank to another. However, of all factors, the most common are:

Your income, savings, debt obligations

Cost/value of the property mortgaged

Your repayment track record for other loans, credit cards, etc

What are the usual interest rates and tenure for repayment offered for a loan against property?
Interest rates on loan against property range 13-16% and the loan tenure can be up to 15 years.
LAP advantages
1. An idle asset can be utilised to aid financial comfort.
2. Loan processing is comparatively faster than a housing loan.
3. You can prepay this loan without any penalty. By prepaying whenever possible you can bring down the cost of credit (some banks permit a minimum part-payment of Rs5,000 most start at Rs10,000).
4. You can increase the borrowed loan amount through a refinance option, when property value rises. This is particularly useful for expanding a growing business.
5. You will retain property ownership. In the event of being unable to repay, the property can be sold to settle the dues with the surplus cash allowing one to start afresh. This can been a boon in case of a financial crisis as property value generally rises, providing you a platform to rebuild your finances.
Some disadvantages of LAP
1. Banks generally do not provide loans beyond 60% of the value of a house property and 50% of a commercial property.
2. New businesses generally cannot have access to LAP. They should have been in existence for at least 3 years. Salaried individuals, of course, can get it if they are employed for over 1 year itself.
3. There will be some processing charges usually in the range of 0.5-1% depending on the support given by the bank. Some banks may ask us to do the running around to get the encumbrance certificate and legal opinion ourselves and charge us lesser.
A loan against property is one of the best ways to raise money. The most obvious disadvantage is losing your property in a bid to repay the loan. Hence, base your decision on your repaying capabilities.

The writer is CEO of BankBazaar.com, an online marketplace for personal, home and car loans