A loan is the sum of money borrowed by an individual or entity from a bank or financial institution. The borrower incurs debt and is liable to pay interest on the borrowed amount until they have repaid the loan in full within a specified time frame. Loans have become a part of our lives and are often the source of funds aiding people to fulfill their goals. Commonly available types of loans include car, property, personal, education, business, and loan against property (LAP).
Apart from the end-use, the most important criteria in determining which loan one should opt for depends on the interest rate. Suppose you need money to purchase a car, then a car loan will be the appropriate choice. Similarly, if you are planning to send your child abroad for higher studies, then you must pick an education loan. However, if the expenses exceed the amount sanctioned under the education loan, then the smart decision would be to go for a loan against property rather than breaking your investments and other savings or going for a more expensive unsecured personal loan.
What is Loan Against Property (LAP Loan)?
A loan against property is a secured loan obtained by mortgaging a self-owned property to get a high loan amount at very competitive rates. LAP interest rates are lower than that of a personal loan with the option of a longer tenor. Hence, it is the preferred choice of loan for many.
Pros and Cons of LAP Loan
Here are some of the Pros and Cons of a loan against property.
- Being a secured loan, the risk to the creditor is relatively less. As a result, LAP interest rates are lower compared to other loan products. Loan against property interest rates is lower than that of personal loan.
- Borrowers can reside in the mortgaged property, even during the loan tenor.
- A large sum can be availed of under LAP (up to 70% of property value). This is certainly higher than the amount one can avail of under a personal or any other loan.
- The long tenor option helps lower the EMIs.
- The evaluation and approval process may take a little longer than is usual for other types of loan applications.
- The property to be used for a mortgage should be clear from any previous running loans, such as a home loan.
- Failure in repayment of the loan gives the lender the right to take possession and auction the property for recovery of the outstanding loan amount.
Be Mindful of These Factors Before Applying for One
There are many other factors that need to be considered before availing of a loan against property:
Evaluate Your Eligibility and Documents
Before opting for a loan against a property, make sure to check the eligibility criteria. Though criteria may differ from lender to lender, basic ones, such as age, income levels, and credit history of the applicant are the common factors that determine their eligibility. Always try to maintain a good CIBIL score (over 700 points) to improve the chances of faster approval of LAP. Preparing first hand and complying with the eligibility criteria will save time for the loan process and will reduce chances of rejection.
Evaluate Your Income and Future Repayments in Advance
For any loan, it is of utmost importance that one plans for repaying the debt. Your income is the single most important determinant of your repayment capacity and eligibility. Online LAP EMI calculators will help you gauge monthly installments and plan repayments accordingly. By punching in principal amount, tenor, and the interest rate offered by lenders, the LAP EMI calculator will instantly calculate and provide the exact EMI amount along with a break-up of the total interest cost that will be incurred on the loan.
Go for Low-Interest Rates and Shorter Tenors
As mentioned above, mortgage loan interest rates offered by lenders tend to vary. Since these are high-value loans and are available for longer tenors, it is advisable to pick a lender who offers a competitive loan against property interest rates. With interest amount being the major component of any loan, you should always pick the shortest possible tenor, based on your ability to repay higher monthly EMIs, and a creditor who offers the lowest possible mortgage loan interest rates for lowering the total interest outgo through the loan cycle.
Look Beyond the Headline Offers into the Fine Prints of the LAP
Along with the interest cost, there are many other charges that often people forget to consider while evaluating the total overall loan cost. Lenders may charge you a service fee or processing fees, prepayment charges, stamp duty, and penalties on late payment. It is advisable to have knowledge of all these charges and terms.
Additional Read: Everything You Need to Know About a Loan Against Property