Loan Against Property: Few Advantages, But Bigger Risks

Most banks and financial institutions in the country, offer you loan against property. What this means is that you get a large loan amount, but, your property is pledged to the bank.

Advantages of loan against property

a) Big ticket loans

Properties generally run into millions, so, you can get substantial amount of loans. However, large size loans, does not mean you grab them. Remember, the EMIs can be substantial and you need to service the loan as well.

b) Mortgaged property means lower interest

Since it is an asset backed product, you tend to get lower interest rates, than some other loans like personal loans or gold loans. Interest rates can vary between 12-18 per cent, depending on the institution. Look for banks or NBFCs and housing finance companies, that offer a better proposition as far as interest rates are concerned.

The big risks with property loans:

1) Bank has the right to sell your property

Since this is an asset backed security, the bank has the right to sell your property and recover the dues. This is a big disadvantage over other loans like personal loans.

What this means is that one should not avail these loans, unless one is sure that they will be able to honour their obligations in terms of timely payment of principal amount and interest.

Again we wish to emphasize this is a big risk.

2) Long time for approval

This type of loan takes long time for approval, unlike gold loans or personal loans. Banks will need to satisfy themselves over the asset and make sure it is in the name of the applicant. It will have to examine various other legal aspects and due diligence will have to be conducted. The bank will examine the title of the property, and if there are any encumberances.

3) No tax benefits

One of the other big disadvantages of loan against property is that there is no tax benefit, unlike a home loan, where one receives tax benefits.

4) Various check will be conducted by the bank

All other checks like including re-payment capacity, credit score etc., will be examined by the bank.

The loan to value would really be dependent on the bank or the financial institution from which you are taking a loan. The bigger question would be on the valuation of the property.

You may end-up having three different institutions, giving three different values for your property. One can expect around 70 per cent of the value of the property as loan, that could be sanctioned.

Conclusion

If you are looking for a really large size loan, than a loan against property should be ideal.

However, they have many disadvantages. They are likely to be cumbersome and would come without any tax benefits.

The biggest worry though is the fact that these loans would mean a greater risk to your property. Yes, the interest rates are slightly lower as compared to personal loans and gold loans, but, you can opt for the latter. It is better to pledge gold, than pledge property.

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