Most of us imagine the possible financial emergencies we might face in the future and wondered how we will manage it. If you have had these thoughts and decided you would take a personal loan if a situation like that comes up.
You must be aware that personal loans attract a high rate of interest. Therefore, most of the homeowners in the country choose Loan Against Property (LAP).
What is Loan Against Property?
A Loan Against Property is a form of secured loan wherein a homeowner pledges a residential or commercial property as collateral with the bank to avail of a loan. If you are in need of funds, you can pledge your property with your bank and avail of a loan.
The maximum loan amount you would be eligible for depends on the value of the property. The loan amount, at any cost, will not exceed the current market cost of the property.
You can use the loan amount for any purpose such as paying for your wedding expenses, funding your education, traveling, or starting a business. Just like your regular home loan, Loan Against Property also has flexible repayment tenure.
When it comes to LAP, the chance of you getting the loan is higher as it is low risk for your lender. Salaried individuals, non-salaried individuals, and businessmen can apply for LAP. The interest rate on Loan Against Property may vary between 12% p.a. to 16% p.a. and the tenure of the loan can go up to 15 years depending on your lender. For example, Axis Bank offers a loan tenure of up to 20 years on Loan Against Property.
Things you Must Know before you opt Loan Against Property
Lenders will Evaluate the Cost of your Property:
When you apply for a LAP, lenders will evaluate the current market price of the property. Though you may have evaluated the value of your property, lenders will have a dedicated team who will determine the current market price of your property and will not go by your evaluation.
Once the lender receives your LAP application, the lender will send an appraiser to evaluate the value of the property. The appraiser will consider various factors such as the location of the property, the age of the property, and the overall condition before determining its value.
Compare the Loan-to-Value (LTV) Ratio:
An LTV Ratio indicates the size of the loan compared to the value of the property used as collateral. Before approving your LAP application, lenders will calculate the LTV Ratio to figure out determine how risky a loan is. Compare the LTV offered by various banks before you choose one.
Most public sector lenders offer up to 65% of the value of the property as a loan and most private sector banks offer up to 70% to 75% of the value of the property as loan. Make sure you choose a LAP that benefits you in the longer run.
Be aware that Loan Against Property does not give you any tax benefits. Whereas, a regular home loan gives your tax benefits. However, LAP usually does not charge a prepayment fee or a pre-closure fee.
If you still feel availing a personal loan is a better idea, check out the differences between a Loan Against Property and a personal loan.
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Difference between Loan Against Property and Personal Loans
|Personal Loans||Loan Against Property|
|It is an unsecured form of loan||It is a secured form of loan|
|Property is pledged as collateral||Personal loans can be availed without any collateral|
|The interest rate on personal loans is high compared to other types of loans||The interest rate on LAP is relatively loan compared to personal loans|
|As the interest rate on personal loans are high, the EMIs are high too||EMIs are lower as the interest rate is lower|
|The maximum loan amount is determined based on the income of the applicant||The maximum loan amount is determined based on the current market value of the property|
|Maximum loan tenure can go up to 5 years||Maximum loan tenure can go up to 15 years|
Documents Required to Apply for a Loan Against Property
|Duly-filed loan application form||Duly-filed loan application form|
|Passport size photographs||Passport size photographs|
|Valid proof of address such as Aadhaar Card, Passport/Driving License||Valid proof of address such as Aadhaar Card, Passport/Driving License|
|Valid proof of identity such as Pan Card/Aadhaar Card/ Voter’s ID Card||Valid proof of identity such as Pan Card/Aadhaar Card/Voter’s ID Card|
|Proof of income- Latest salary slips, bank statements, and Form 16||Proof of income- Proof of business/Last 3 years IT Returns/Balance sheet/Profit and Loss Statements/Business Bank Statements|
|A cheque for processing fees||A cheque for processing fees|
Though a Loan Against Property may be an ideal solution for those facing a financial crisis, one must be aware of the dangers of availing a LAP.
If you default on the loan, the bank has the right to take possession of the property and auction it to recover the loan amount. Therefore, weigh the pros and cons of availing a Loan Against Property before you avail one.