Among all the loan taking options, loan against property has become very popular these days among the masses. These loans are classified as multi-purpose loans that a borrower can take from banks or other lending institutions by pledging his currently owned property as collateral.
These loans are also popular because they make you eligible for a large amount. Depending on the lender’s policy and the value of the property, you can receive a loan amount of up to 40% to 80% of the market value of the property. Also, you can promise both residential and commercial property as collateral, given that you possess all the documents of that property. But still, there are various factors that you need to consider before taking a loan against a property. The following article will enlighten you about the factors that will help you to decide whether taking this loan is a good option for you or not.
The interest rate charged
There are different factors on which the loan against property interest rate depends upon. These factors include your income, credit history, tenure, loan amount as well as policies and rules of the lending institution. If you are thinking about getting a loan against property, make sure to opt for the most affordable offer from the lender’s side. So before finalising any lender, make detailed research and find out which lender is offering you the most affordable interest rate for the loan. It may seem to you that small differences initially will not make a huge difference to the interest amount. But in the long run, it greatly affects the total amount you will be paying as interest.
The loan amount authorised
In the case of a loan against a property, the amount of the loan you are eligible for mainly depends on the market value of your property. Generally, the loan amount that lenders offer to you varies from 40% to 80% of the property’s market value. So if you are looking to obtain a higher value of the loan, you should compare the policies of different banks. And other lending institutions and get the highest amount as per your property.
The repayment tenure of the loan
Because these loans are large in their principal amounts, that’s why their tenures are also very long. Generally, it revolves around 15-20 years. While considering the affordability of the loan, you should always try to make a balance between the loan tenure and the EMIs. A long loan tenure will offer you smaller EMIs. But this long period of time also means that you will be paying a large amount as interest. Whereas a short tenure will pay off the loan faster. It also means that you have to pay larger EMIs to complete the loan. Also, remember that the interest in such loans is calculated using a compounding formula. So choosing a shorter tenure whose EMIs you can afford easily will be a good idea.
Processing fee and other charges that you will be paying
Processing fees and other charges are those amounts that borrowers often forget to add to their overall loan expenses when they make financial preparation ahead. These charges also affect the entire expense of the loan. That’s why they should come into your consideration while you choose a loan against property. Usually, these charges include service charges, statutory charges, prepayment charges and also the stamp duty (as per state charges). That borrowers have to pay in order to obtain the loan amount. Such charges significantly change the overall borrowing amount and thus affect your loan repayment ability.
You won’t be entitled to tax benefits
In this loan, you have to pay a tax on the amount that you are using to repay the loan. Therefore, people choose to take education loans and home loans at a higher interest rate. Rather than taking loans against the property because they get tax benefits in the case of former types of loans.
Advantages and disadvantages of loan against property
The advantages are:
- You can use the loan amount for any personal or business purpose, such as covering sudden medical expenses or starting a new venture.
- These loans are also relatively easier to get as the lender receives a guarantee for the money they are lending.
- People prefer to buy loans against the property because they get a large amount of money (up to 80% of the market value of the property), get flexibility in loan repayments and the interest is also lower than other loans.
- They can have longer loan tenure which makes the EMIs shorter.
- Your property does not add any value to your earnings. However, by mortgaging it for a loan against property, you get to use the value of your property without losing its ownership. Also, if it’s a house or a shop that you are pledging as collateral, you can use the loan amount while living in the same house or using the shop for your business.
The disadvantages are:
- The waiting period of securing the loan is quite long in loan against the property. Because lenders perform a background check of the borrower and see if the property is legitimate or not.
- They also check applicants’ repayment capabilities, credit scores and other parameters, and this entire process can also be very time-consuming.
- Another problem could arise while evaluating the market value of the property that the borrower is pledging as collateral. There is no standard method or any pattern to calculate the market value of the property.
- Another big risk in a loan against property is that lenders get complete authority over the property given as collateral. This means that in case the borrower fails to repay the loan amount in time, the lender can restructure the loan or even sell it to recover their money.
Loans against property is most secured forms of loans, besides offering the benefit of arranging a large sum of money without selling a property. However, to truly get the benefit of this loan in the most profitable way, you need to keep in mind all the above points while choosing the loan and the lender.