Loan Against Property: 10 Benefits You Should Know About

A Loan Against Property or a Home Equity Loan is an easy solution for your financial needs. It allows you to unlock the value tied up in your property while still residing in it. It is a versatile loan that can be used for various legitimate purposes, such as launching a business, renovating your home, buying high-value consumer goods, funding your children's education abroad, and more.

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

If you own a fully constructed residential or commercial property without any other encumbrances, opting for a Loan Against Property is often a better choice compared to other loan alternatives. This is because it offers substantial loan amounts at a reduced interest rate, leveraging your property as collateral.

Certain banks also provide Loan Against Property as an overdraft facility, allowing you to access only the required funds from your approved credit limit and incurring interest solely on the amount you use.

There are several reasons why LAP is a better option compared to other borrowing options, especially Personal loans.

Here Are the 10 Benefits of Availing of a Loan Against Property:

1. Lower Interest Rate:

Since a Loan Against Property is secured by collateral, the lender's risk is lower, as any potential losses can be recovered by legal means involving your property. This security is the primary reason why lenders offer a lower interest rate for this type of loan. This lower rate assists your repayment efforts by reducing your interest payments, ultimately decreasing the overall cost of the loan. In contrast, you don't enjoy the same benefit when opting for an unsecured loan like a Personal Loan, as lenders typically charge higher interest rates to mitigate their risk.

2. High Loan Amount:

When choosing a loan against your property, you use your property as collateral. The lender then approves a loan amount, typically ranging from 70% to 75% of the property's current market value. This percentage can vary depending on factors such as whether the property is residential or commercial and whether it is occupied, vacant, or rented. This substantial sum can be used to fund personal or business expenses and is notably higher than what you can borrow with an unsecured loan like a Personal Loan.

3. Longer Loan Tenure:

One significant advantage of choosing a Loan Against Property is the option to repay it over a longer period. Depending on the lender, this repayment tenure can extend up to 15 to 20 years. This is especially beneficial when dealing with a substantial loan, as it allows you to customise your repayment plan by choosing suitable monthly instalments. The combination of a longer repayment tenure and a low interest rate makes it an efficient and cost-effective choice. Typically, the repayment tenure for Personal Loans is limited to up to 5 years. However, if you borrow a significant amount, this can result in sizable monthly payments that may be challenging to manage.

4. Quick & Hassle-free Loan Process:

Getting a Loan Against Property is quite a quick and hassle-free process since it is a secured loan, and banks are readily willing to extend the credit. If you own a property, you can use it as collateral with a reputable bank to secure a loan for various personal or business requirements.

5. Easy Eligibility & Minimal Documentation:

Loan Against Property has easy eligibility criteria and requires minimal documentation. Take note that these requirements may vary from lender to lender.

Here are the LAP eligibility criteria for salaried individuals:

- An individual permanently employed in a Public Sector Enterprise, publicly listed company, government undertaking, multinational corporation, or reputable private limited company is eligible.

- The applicant must be at least 21 years old when applying for the loan, and the maximum age at loan maturity or retirement age should not exceed 65 years.

Here are the LAP eligibility criteria for self-employed individuals/ professionals:

- Self-employed individual or professional with a steady income business.

- It is necessary for applicants to have a record of filing Income Tax returns.

- The minimum age requirement for loan application is 21 years, and the maximum age at loan maturity should not surpass 70 years.

Here are the basic documents required for Loan Against Property:

- Application form

- KYC documents (identity and address proofs)

- Income proof

- Bank statements (last 6 months)

- Property documents

6. No Restrictions on the End Use:

A Loan Against Property allows you to comfortably handle significant expenses. This is because it provides a substantial loan amount at a low interest rate and over an extended period. Expenses like home renovations, property purchases, wedding costs, overseas education, and debt consolidation can strain your finances if paid out of pocket. Fortunately, the generous loan amount covers these expenses with ease. However, it is essential to borrow prudently and only take what you can comfortably repay, ensuring the safety of your collateral is not compromised.

This is why borrowers across the country prefer a Loan Against Property over unsecured alternatives. Additionally, while Personal Loans come with numerous eligibility criteria, secured options like this one simplify the application process with minimal documentation required. Beyond these benefits, borrowing through this instrument can be even more beneficial if you choose a lender that offers additional features. These can significantly enhance your overall experience and help you manage your cash flow efficiently.

7. Continue Occupancy of the Property:

When you have a mortgage on your property or residence, there is no requirement for you to vacate your house or flat. You can remain in your current location as you choose while meeting the conditions for repayment.

8. Diverse Types of Properties Can Qualify:

In the case of a Loan Against Property, you have the flexibility to use a variety of property types as security to secure the loan. Typically, lenders assess residential and commercial properties for loan approval. The property's occupancy status, whether self-occupied, rented, or vacant, is not a major factor - the lender will consider it regardless of its current use. Nonetheless, the properties offered as collateral must be free from any legal encumbrances or disputes and possess a clear title. Lenders may also consider properties owned jointly as eligible collateral for a Loan Against Property, but the specific criteria for co-ownership eligibility can vary from one lender to another.

9. No Prepayment Charges:

One of the primary benefits of a Loan Against Property is the minimal to zero foreclosure fees. Foreclosure refers to the early repayment or closure of the loan before its designated term ends. Most banks or NBFC lenders typically impose a foreclosure charge, which ranges between 2% and 4% of the remaining principal amount, in addition to applicable taxes. Nevertheless, some lenders do not charge these fees for LAP. You can settle your Loan Against Property without concerns.

It is advisable to opt for lenders who are transparent in their communication about all charges associated with the loan processing and explicitly mention these fees in the loan documentation. Ensure that there are no concealed or hidden fees.

10. Tax Benefits:

Another noteworthy benefit of a Loan Against Property is that it enables you to receive tax benefits on the interest payments. However, it is important to understand that these benefits are applicable only when you use the loan for specific purposes.

Section 37(1) of the Income Tax Act, 1961, permits a deduction when you utilise the Loan Against Property for business purposes. You can claim tax benefits on the interest paid and processing fees as business expenses.

Likewise, if you use the loan to purchase residential property, you can also claim a tax deduction on the interest paid under Section 24(B) of the Income Tax Act, 1961. The maximum deduction is Rs. 2 lakhs, and you need to provide substantial proof regarding the use of the funds to comply with Section 24(B).

It is important to note that you cannot claim tax benefits if you use the loan for personal expenses such as education, travel, vacations, weddings, and more.

To conclude:

There are numerous advantages to securing a Loan Against Property. Nevertheless, when seeking such a loan, it is essential to carefully evaluate the lender's qualifications. Since your association with the lender will be enduring, opt for one with a well-established reputation and a strong sense of trustworthiness.

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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.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
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.

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