Need 5-10 Lakh or More? Why Loan Against Property is a Better Choice?
Loan Against Property is a secured loan wherein the borrower pledges their currently owned residential or commercial property for a sum of money at a fixed or floating rate of interest. The amount drawn is a percentage of the value of property as decided by the bank or a lending institution. In most of the cases, banks will lend around 55% to 65% of the property value as the loan amount. The amount will basically depend upon various factors like location of the property, borrower’s income, loan duration etc. The lender gets a right on your property and in case of the failure to repay the loan the lender can auction the property to recover their dues.
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Loan Against Property is offered for a number of purposes. Not every lender may agree to lend for every purpose. For example, SBI does not give out LAP for speculative purposes. Most banks do give out loans for business purposes only. Almost all lenders offer Loan Against Property in India for funding children’s education within or outside India, for payments related to emergency medical requirements, for conducting wedding ceremony of self or children, as well as for payments related to international travel and vacation purposes. Business investment-related LAP is available from many lenders, but it is best to check beforehand.
Let us now have a look at some of the key benefits of applying for LAP:
Low Interest Rates:
Loan Against Property Interest Rates are almost always offered at floating points and very rarely at fixed points. This means that the borrower will charge an interest rate where the lender will take a base rate, (generally repo rate) add a margin percentage amount to it to cover their own costs and profits and lend it out to the borrowers. If RBI’s repo rate is 4% and bank considers their own cost to be another 4%, they will lend out LAP at 8%. Loan Against Property Floating interest rates will always be anywhere between 2-3% lower than fixed interest rates.
The tenure is the duration of EMIs during which you have to repay your loan. When you take out any unsecured or fixed interest rate loan, bank will never offer you more than 5 years of loan tenure. The reason is simple- bank cannot predict where the interest rate will go over such a long period and wants to keep their options close to them. LAP is a floating interest rate loan and does account for the interest rate unpredictability over a long time. This means that lenders can provide long term loans like those of 10, 15 even 20 years because they know that no matter where interest rates go, their loans will always follow them.
Low to no pre-payment charges:
The regulations with regard to large amount secured loans are such that the banks cannot charge too much of prepayment fees with them. For most fixed rate loans like Personal Loans, banks will only allow prepayment in full and will also charge around 4% pre-payment fees. LAP being a floating interest rate loan, comes with no or low prepayment fee. They are also required to allow the borrowers to make partial amount prepayments. Most lenders will either charge no prepayment charge on LAP or will only levy somewhere around 0.5% to 2% prepayment charges.
Lower EMI amount:
The fact that Loan Against Property is a long duration loan also means that the EMI amount will always be affordable. Consider that you are looking to borrow about Rs 20 lakhs for starting a new business. You have two options to begin, you can either take a Personal Loan that will run for around 5 years and come with EMIs of around 50,0000 or more or you can take out a LAP for 15 years duration and you will only have to pay an EMI between Rs 25,000 to Rs 30,000.
Easy to Get:
It is much easier to qualify for Loan Against Property Eligibility than the PL eligibility criteria. Taking up from that same example in the previous point, you should consider that while getting a LAP may seem like a lot of paperwork and legwork, you have a much stronger chance of LAP approval in comparison to Personal Loan of such a large amount.
Yes the paperwork in a Personal Loan is much lesser but keep in mind that it is also an unsecured debt which means that the bank will have to be assured of many more things and will conduct a much thorough due diligence than in case of any Loans Against Property where they are sure that the loan is going to be returned. They can always liquidate the property that has been pledged with them in case the borrower defaults on loan.
Ongoing property ownership:
Many people do not realize this simple fact but when you take out property loans, you still continue to be the owner of property and can continue to use it as it is. If you are looking to start a business by putting out property as mortgage, you can still continue to run your business from the same property. All you have to do is pay the EMIs on your LAP.
All said and done, there are a number of factors which make Loans Against Property a very good deal compared to almost any other kind of loan or borrowing. It is easy to get, it is easy to repay, it does not require you to move out of your property and it does not require you to worry about prepayment or hidden charges of any kind!
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