Loan against property - As it is a secured loan given for longer tenure, it can be uses to clear costly unsecured loans
A loan against property (LAP) is a popular secured loan wherein your residential or commercial property is pledged as collateral with the bank to avail the loan.
Features:
LAP is a secured credit instrument wherein your property poses as a legal asset to secure your loan amount.
As a potential borrower, you can pledge either a residential or a commercial property to avail the loan. If you have a residential and a commercial property and want to borrow a large amount, putting your commercial property as collateral makes better sense than pledging your residential property.
You can avail a LAP by pledging any of these as collateral with the lender:o Self-owned residential or a commercial property o Self-owned piece of land o Self-owned, rented commercial or residential property
The maximum amount that you can borrow depends on the valuation of your property – the loan amount cannot exceed the current market value of the property
LAP can be availed for anything from planning a wedding to funding educational expenses abroad, travel, and business, among others
Akin to the way home loans work, LAP also comes with flexible tenure options. While the maximum tenure for home loans is 30 years with many banks, most lenders allow for a tenure of up to 15 years in the case of LAPs.
Lenders usually sanction about 60-65% of the property's value. You can choose a flexible repayment option, transfer your loan, make part-payments, or pre-close your loan before the tenure comes to a close.
Things to keep in mind
If you are planning on taking a loan against your existing residential or commercial property, here is what you should be aware about:
Your property isn't the only instrument that determines your loan approval. Lenders evaluate a bunch of parameters before approving your loan. Aspects like your credit score, repayment history and income are also significant influencers. Representatives from the bank or non-banking financial company will first evaluate your property before sanctioning the loan Most lenders require that you submit your property documents to the bank while availing the loan – the same will be returned to you after the principal and interest are repaid in full You can choose a tenure of your choice depending on the size of the loan amount and your repayment convenience. The maximum tenure is 15 years in most cases – longer tenures attract lower repayment amounts than short ones
Tax benefits:
There aren't any tax benefits associated with LAPs. If you have a home loan running on the current property against which you've availed an LAP, you can claim tax benefits on that.
Part-payments and pre-closure of your LAP don't attract any additional fees and charges. You are free to make as many part-payments as you wish (usually after completing a certain period in your loan tenure – usually one year) and pre-close your loan much before the end of your tenure.
Co-applicants:
If your current property against which you wish to avail an LAP is owned by more than one person, the additional person(s) automatically qualify as co-applicants. Thus, in cases where multiple individuals own a certain property, they must be intimated, and their signatures need to be obtained on the loan documents.
Impact of property rates going down
Falling property prices are a major risk to the LAP segment, and lenders have struggled with NPAs in this segment over the last few years. That said, property rates are almost always bound to fluctuate, and asking for additional collateral in the wake of a meltdown in property rates can certainly be a possibility in the near future. A complete meltdown, however, is quite unlikely to happen anytime in the near future. So LAPs still remain a major portfolio for banks and NBFCs.
LAP acts a brilliant tool for debt consolidation. So if you have a few unsecured loan accounts along with a small property loan or a car loan, you might want to consider taking an LAP to consolidate your debt.
The writer is founder & CEO Qbera.com
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