8 Key Things to Remember When Availing of a Loan Against Property

A Loan Against Property, also known as a Home Equity Loan, is a simple solution for your financial requirements, as it allows you to leverage the locked-up value of your property while still enjoying its occupancy. It is a multipurpose loan that can be utilised for various legitimate purposes, such as starting a business, home renovation, purchasing high-value expensive consumer durable items, children's higher education abroad, and many more.

Furthermore, the interest rate on a Loan Against Property is typically lower than that of an unsecured loan. This loan option is offered by nearly all banks, housing finance companies, and Non-Banking Financial Companies (NBFCs) operating in India.

When you possess a completely built residential or commercial property without any additional obligations, opting for a Loan Against Property stands out as the superior choice compared to alternative loan options. This is due to the fact that it provides substantial loan amounts at a reduced interest rate, leveraging the security of your property as collateral.

Certain banks also offer a Loan Against Property as an overdraft facility, enabling you to access only the necessary funds from your approved credit limit and incur interest solely on the amount you utilise.

However, to ensure you make the most of this borrowing option, you must know these 8 Key Things to Remember When Availing of a Loan Against Property.

1. Analysing And Providing the Correct Property Valuation:

Each property possesses a unique valuation determined by factors such as its age, geographical location, the reputation of the builder, size, and the amenities it offers. Consequently, it is crucial to have a thorough comprehensive understanding of your property's overall worth to guarantee that it secures the desired loan amount when used as collateral.

Typically, a property with a high appraisal value and located in a desirable area can expedite loan approval since the lender is more likely to view it as low risk. Hence, it is essential to thoroughly analyse and provide the correct property valuation when availing of a Loan Against Property to ensure you receive the right estimate of the loan amount.

2. Comparing Multiple Lenders in Terms of Interest Rates:

The Loan Against Property interest rate is a crucial factor in establishing its affordability. The lower interest rate will help you save a substantial amount in the long run as the Loan Against Property is generally a high amount long-term loan.

Hence, before submitting your loan application, you must compare multiple lenders to select the most competitive interest rate for your Loan Against Property. Additionally, you should seek out flexible repayment terms, as they can simplify the repayment process and enable you to pay off the loan more swiftly.

3. Comparing the Different Fees And Charges:

In addition to the interest rate, when you apply for a loan, lenders may impose various charges and fees, such as processing fees, prepayment charges, service fees, late payment charges, etc. Hence, you need to have a conversation with the lender about these extra charges before proceeding with the loan application.

It is essential to be vigilant about any supplementary charges, as certain lenders might offer attractive low interest rates but impose additional fees. Clarify with the lender whether these additional fees are one-time payments or recurring monthly charges. If they recur every month, it is crucial to include them in your financial planning alongside your EMIs to ensure that you can manage your monthly expenses effectively.

4. Choosing the Right Loan Tenure:

A significant characteristic of a Loan Against Property is the loan repayment period, also known as loan tenure provided by lenders to borrowers. Although the loan tenure can vary among different lenders, most lenders typically offer LAP with a duration of up to 15 years.

Remember, the longer the loan tenure, the higher the total interest outgo. However, if you choose a shorter loan duration, you must ensure you can afford the EMI in the long term. Hence, as a borrower, you must find a suitable balance between the tenure and your monthly EMIs and select the right loan tenure.

5. Checking Your CIBIL Score:

The interest rate you receive from a lender for a Loan Against Property is also determined by your credit score. Your credit score is a numerical representation of your repayment history and provides the lender with insights into how you have previously managed your loan and credit card payments.

If you maintain a robust credit score of 750 or higher, you can secure a Loan Against Property with a lower interest rate and have the opportunity to negotiate other terms and conditions with the bank. Conversely, if your credit score is low, the bank might either decline your loan application or offer it at a higher interest rate, potentially resulting in larger EMI payments.

Therefore, if your credit score is healthy, you should confidently apply for a Loan Against Property as you are likely to receive the loan offer at favourable loan terms, but if your credit score is poor, it is advisable to work on improving your credit score before applying for a loan.

6. Knowing the Eligibility Criteria of the Lender:

The eligibility requirements for the Loan Against Property will vary depending on the lender. However, it is crucial to familiarise yourself with these criteria before applying for a loan. Doing so will reduce the chances of your application being rejected and ensure you receive the desired loan amount. Furthermore, meeting these criteria not only enhances your approval prospects but also expedites the loan processing.

Most leading lenders require you to fulfil simple eligibility conditions. These typically include...

- being an Indian resident

- aged over 25 years

- either employed or self-employed

- having a consistent source of income

7. Assessing Your Loan Repayment Capacity:

The loan amount approved for individual borrowers depends on the borrower meeting the necessary income criteria to ensure they can repay the loan on time. When an applicant boasts a substantial regular income, the bank gains greater confidence in the borrower's ability to consistently make higher EMI payments and may approve a higher loan amount than what the borrower can comfortably repay.

While the bank's primary focus remains on receiving timely EMI payments, in case the borrower fails to meet his/her obligations, the lender can sell the collateral property to recover the dues. Therefore, to avoid such a situation, it is important for you, as a borrower, to assess your loan repayment capacity and opt for the loan amount that you can repay without experiencing any financial strain.

8. Negotiating with the Lender:

Before securing the loan, it is advisable to negotiate with the lender regarding the terms and conditions of the loan. You can discuss and potentially negotiate all fees, such as interest charges and processing fees. Therefore, negotiating with your lender to obtain the most favourable deal is advisable. As discussed earlier, negotiation is especially possible when your credit score is high.

To conclude:

If you need a substantial amount of money for either personal or business purposes and own a property eligible for a Loan Against Property, it makes sense to consider this option over unsecured loans like Personal Loans. This is because the interest rates and EMIs associated with such loans are typically lower than those of other loans, and the loan approval process is relatively quicker and less complicated.

However, a borrower should get a Loan Against Property only if they are confident in their ability to repay it. In the event of a default, the lender has the right to sell the property to recover the outstanding dues. Therefore, it is not advisable to use your primary residence or property as collateral for a business venture that carries substantial risk.

Furthermore, before applying for the loan, make sure you thoroughly assess and compare factors like interest rates, fees, margins, and more from various lenders. This thorough evaluation will enable you to make a well-informed decision, especially considering that a Loan Against Property typically represents a long-term commitment.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

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This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.