A loan against property (LAP) is a secured loan taken against an immovable property (real estate) as collateral. An individual can use their fully constructed residential or commercial property as collateral to borrow funds from various banks or financial institutions.
Borrowers opt for loan against property to bridge the requirement of funds for various purposes including weddings, education, business expansion, home construction or renovation, and medical emergencies to name a few. There are several benefits of loans against property such as easy approval, attractive interest rates, high loan amounts, longer tenors for repayment and tax benefits.
To apply for an LAP, you can check the loan against property eligibility criteria on the lender’s website. In this article, we will explore the common mistakes one must avoid when availing an LAP.
Check the Interest Rate
Understanding the interest rates of loans against property can be tricky for someone who’s unaware of how these rates are set. While these loans generally have lower interest rates than top-up loans, they can get higher with longer tenors. Thus, it’s important to conduct thorough research on market interest rates before you opt for loan against property. The interest rates for LAP could range from 8.2% p.a. to 14.50% p.a., depending on factors such as loan tenor, collateral property, and borrower profile. It is advisable to check with various lenders and compare their interest rates to choose the most favourable LAP.
Be Mindful of the Borrowing Amount
The amount of loan sanctioned in the case of a loan against property can range from 60% to 90% of the market value of the pledged property. This might get higher depending on the lender and the borrower’s profile.
Considering the quantum of funding available in the case of a loan against property, one may be tempted to borrow an amount higher than what they need. However, it’s advisable to apply for a loan amount that you absolutely need and can repay comfortably. A good way to do this is to determine your debt-to-income ratio and the amount that you’re able to set aside for the EMIs.
Additionally, you must not miss your EMI payments after the loan is sanctioned in order to avoid late payment fees. Default on loan repayments also damages your credit score, which consequently affects your capacity of borrowing loans in the future.
Charges on the Loan
Apart from the interest payments, there are other charges attached to an LAP such as processing fees, prepayment liability and late payment fees. Make sure to check these charges before you apply for a loan. Moreover, check the liability of the lender in case of loss of your property papers, since the original papers are in the lender’s custody. Once you take all these factors into account, it is easy to determine if the particular LAP is financially viable for you.
A useful facility that can be availed with respect to an ongoing LAP is loan against property balance transfer. This facility allows the borrower to transfer the outstanding principal on their existing LAP to another lender for lower interest rates, extended tenors, better services etc. This can help you reduce your EMI payments, save on interest and avail of a higher amount of loan. For instance, Bajaj Housing Finance Limited (BHFL) offers a loan against property balance transfer facility in India with several attractive features. Hence, it is a good idea to be updated on the market interest rates and other trends to gain the maximum benefit from your loan.
Tax Benefits
When you’re in a need of finances, it is easy to ignore all the aspects of a loan. When you opt for a loan against property to purchase a house, you can claim tax benefits up to Rs.4 lakh on your principal repayment interest payments under Sections 80 C, 24B, 80EEA and 80EE, depending on your eligibility. Moreover, a borrower who uses the funds for business purposes is allowed to claim full interest under Section 37(I) of the Income Tax Act. It is also possible to claim deductions on the expenses incurred on loan against property documents required. Thus, you must check the tax benefits that you’re eligible for, and accordingly claim the deductions on your LAP.
Other Factors
There are other mistakes that you must be careful to avoid when applying for a loan against property. One of them is to determine your loan tenor wisely. While a shorter tenor period saves the total interest amount, a longer tenor translates to lower EMIs. You should consider your finances to find the balance between the tenor and EMI amount. Secondly, it’s easy to make the wrong choice of lender due to lucrative marketing tactics. Make sure what your actual interest rate will be through representatives of the lending company before signing up for your LAP.
Conclusion
Although one could benefit greatly when they opt for loan against property, it’s imperative to be careful about certain aspects. These include comparing interest rates, checking processing charges, choosing a viable borrowing amount and tenor, and availing tax benefits. Making the right decision when it comes to these important factors can ensure that you gain the most out of your LAP and avoid losses.
