What is Loan against property? Let’s Understand it further

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A secured loan known as a “Loan Against Property (LAP)” allows you to borrow money from a bank or other financial institution using your property as collateral. The property may consist of land, buildings, or both. When opposed to unsecured loans, this kind of loan usually has cheaper interest rates because the lender has guaranteed the property. The lender has the power to seize and sell the property in order to recoup the loan balance if the borrower defaults on the loan.

Ownership of the Property stays with you. You can use or rent out the property. In case you can’t repay the loan, you can sell the property and pay off the loan.

 

Loan Against Property: Eligibility Criteria

The eligibility criteria for a Loan Against Property (LAP) can vary depending on the lender, but generally include the following:

  1. Income: There should be a steady and sufficient source of income to ensure the repayment of the loan. This can be from salary, business profits, or other regular income sources.
  2. Employment Status:
  • Salaried Individuals: Should be employed with a stable job history.
  • Self-Employed Individuals: Should have a profitable business with a track record of at least 2-3 years.
  1. Credit Score: A good credit score (usually 650 and above) is often required to qualify for a LAP, as it indicates the borrower’s creditworthiness.
  2. Property Ownership: The borrower should be the owner of the property being mortgaged. The property should be legally clear with all necessary approvals and documents.
  3. Property Type: The property can be residential, commercial, or land. However, the lender may have specific criteria regarding the type and condition of the property.
  4. Loan Amount: The loan amount is typically a percentage of the property’s market value, usually between 40% to 75%, depending on the lender’s policies.
  5. Existing Liabilities: Lenders will also consider any existing loans or financial obligations the borrower has, to assess their repayment capacity.
  6. Financial Documents: Proof of income, bank statements, tax returns, and other financial documents are required to establish financial stability and repayment capacity.

 

 

 

Is Loan Against Property Good or Bad?

A Loan Against Property (LAP) has various advantages and disadvantages. Let’s take a look.

Pros:

  1. Lower Interest Rates:
  • LAP typically has lower interest rates compared to unsecured loans like personal loans since it is a secured loan with property as collateral.
  1. Higher Loan Amount:
  • You can avail a higher loan amount based on the value of the property, often up to 60-70% of the property’s market value.
  1. Longer Repayment Tenure:
  • LAP offers longer repayment tenures, sometimes up to 15-20 years, which can make the EMIs more affordable.
  1. Utilization Flexibility:
  • The loan amount can be used for various purposes such as business expansion, education, medical expenses, or even another property purchase.
  1. Tax Benefits:
  • The interest paid on a loan utilized for business activities may be deducted from taxable income by claiming it as a business cost.
  • If used for purchasing or constructing a residential property, interest deductions can be claimed under Section 24(b) of the Income Tax Act.

Cons:

  1. Risk of Property Loss:
  • Since the property is mortgaged, failure to repay the loan can lead to the lender seizing and selling the property to recover the loan amount.
  1. Long Processing Time:
  • LAP can have a longer approval and processing time compared to personal loans because it involves property valuation and verification.
  1. Higher Initial Costs:
  • There are associated costs such as processing fees, legal fees, and valuation charges which can make the loan more expensive initially.
  1. Property Risk:
  • If the real estate market declines, the value of the property might decrease, affecting the loan-to-value ratio and possibly leading to reassessment by the lender.
  1. Interest Rates Fluctuations:
  • LAP interest rates can fluctuate if the loan has a variable interest rate, which can impact monthly repayments.

Pro Tips:

Compare interest rates of various banks and choose the one with lower interest rate.

Review eligibility criteria and documentation requirements to ensure a smooth application process.

Choose a repayment plan that fits your financial situation and check for flexible prepayment options.

Get a professional valuation to ensure maximum loan amount based on true market value.