Understanding the importance of loans against property

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Understanding the importance of loans against property
If you are employed and earning a handsome salary, it gets very easy to arrange funds to fulfill your needs in short term. Any bank will willingly offer you personal loan for which you need to pay interest in the range of 16% to 20%. The normal tenure of personal loan ranges from 1 to 5 years.

What if your cash flow is not date dependent (every end of month) and you want a loan for longer duration so as to keep the EMI on the lower side. Also being in a position to bargain the interest rate will prove to be icing on the cake.

The above two statements will get true if you own a property as there is a very interesting product called Loan against Property being offered by most of the private and public sector banks.

Let’s try to explore this product in this article.

What is Loan against Property (LAP)?
LAP is pretty similar to personal loan; the only difference being you put a property owned by you as collateral against the loan. This property might be confiscated in case you default on the loan. As there is collateral against the loan, banks feel more secure in lending and hence the borrower gets some bargaining power as compared to personal loans which is unsecured.

Why you might need LAP?
You might consider going for LAP for fulfilling following requirements:
1. Setting up a new business
2. Existing business expansion
3. Childs marriage or education
4. Medical Purpose
5. Vacationing

Important Features of LAP
Few features related to LAP which makes this option attractive:
1. Lower limit starts from 2 lakh and there is no upper cap
2. Can opt for both floating and fixed interest rates
3. Longer tenure of repayment
4. Cheaper interest rates
5. Loan up to 40 to 70% of property value
6. Simple processing

Why you should opt for LAP?
There are three basic reasons which make this option worth consideration-
Lower Interest Rate
As it’s a secured loan, you get a bargain of 4 to 5% on the interest rate you pay as compared to personal loan. The interest rate ranges from 11 to 14%. This lower interest rate gives a clear edge to it over personal loan where you pay interest in the range of 16 to 20%.
Longer Tenure of Repayment
This feature further reduces your EMI burden as you can get LAP up to 10 to15 years. When your cash flow is not steady this feature makes the option even more attractive.
Ideal Use of Property
If you own a property and not using it, LAP gives an opportunity of optimum utilization. You do not lose the ownership and get funds at cheaper rates at your disposal.

Word of Caution
There are few negatives of LAP which one should take into consideration before applying –
1. Loss of Ownership of property in case of default.
2. Foreclosure charges may be tricky so get full clarity regarding it before applying.
3. As you are eligible for big amount as loan, lack of planning of repayment might create problem in future.


Read more about: interest rates, loans, property
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