Need to start a new business? Want to get the higher education of your child? Is medical treatment costly? Which you will not be able to afford, a LAP Loan may be your most feasible option as it offers ample finances. You can avail of this loan by pledging your property with a lender.
A loan against property (LAP) permits property owners to leverage an existing property for funding their personal or business needs without losing property ownership. Owing to the secured nature of the loan against property, lenders tend to charge lower interest rates compared to unsecured loans. They also adopt a relatively relaxed approach towards credit scores when evaluating the individual’s creditworthiness.
However, the feasibility of loan approval makes many borrowers ignore some important parameters when it comes to availing a loan against property. Our guide covers the basic dos and don’ts that borrowers must follow before they even start considering how to apply for a loan against property.
Dos of applying for LAP
#1 Compare Loan against Property Interest Rates
The interest rate of LAP usually begins from 8.4% and can go up to be as high as 14.5%. The interest rates tend to vary based on the borrower’s profile and property. Some lenders may also offer an interest rate between 10% and 14%.
#2 Compare Processing Fees
As processing fee, most lenders charge about 1% of the loan amount. However, if you dig deeper, you will come to know that lenders also cap the maximum processing fee they would be able to charge. For instance, a bank may charge 1% as a processing fee with a maximum of Rs 50,000. So, as a borrower, you must check the cap.
#3 Give Special Attention to Loan Tenor
Most lenders offer LAP for up to 15 years. If you are especially interested in a longer tenor, look for lenders who offer a loan against property for up to 20 years.
A higher tenor, however, indicates lower equated monthly instalments (EMIs) and vice versa. You must strike a balance between the tenor you choose and the EMIs. Most financial experts suggest keeping the tenor as short as possible. This helps save on the total loan against property interest outgo.
#4 Evaluate All Possible Risks
Evaluate all possible risks, as pledging your asset against a credit option puts a crucial asset in a vulnerable state. However, if you have the finances sorted, you will not have to be worried about a situation like this. It is wise, however, to keep yourself updated when it comes to a worst-case scenario.
Don’ts of applying for Loan Against Property
#1 Don’t miss factoring in LAP EMI into Your Emergency Fund
Financial emergencies, such as job loss or a critical illness, can come without a warning, hampering your income, cash flow, and even repayment capacity. To mitigate the financial risk arising from such unprecedented exigencies, a borrower must factor in existing EMIs in their emergency fund corpus. An emergency fund or a buffer must be sufficient to cover unavoidable expenses for at least up to six months. So, as soon as you start planning for a LAP, try simultaneously enhancing a buffer or your emergency fund by at least six times the approximate EMI you will pay for the LAP. As financial emergencies come unannounced, ensure that you park the fund in liquid instruments, such as fixed deposits in banks and savings accounts.
#2 Don’t Forget To Factor in Your Processing Fees
The processing charge usually taken by most financial lenders is about 1%-2% of the consolidated loan amount. As loans against properties are typically big-ticket loans, the processing charges turn out to be a significant sum of money. So, a loan against property applicant must factor in processing fees charged by several lenders before submitting their finalized LAP application. Following RBI guidelines, loans against property availed on floating interest rates do not attract prepayment charges. However, financial lenders who offer a loan against property on fixed interest rates may levy foreclosure/ prepayment charges. As prepayment of fixed-rate LAP may cost a sizable amount, consider opting for a floating interest rate on loan against property over a fixed interest rate.
#3 Don’t Borrow an Amount Higher Than What You Can Comfortably Repay
Even though you may need a higher amount as a loan than the value of the property, it is always a good idea to apply for a loan amount that you can pay back comfortably. To be able to pay back your loan easily, try ascertaining your debt-to-income ratio and the amount you can keep aside for monthly EMIs.
The Final Word
In today’s time, many lenders are offering favorable terms that are conducive for your business. The financial landscape has evolved over the decade to make the loan against property application quicker and even less cumbersome. Financial institutions, including banks, are now offering customers flexible terms and high amount loans against their properties, including unconventional ones, such as vacant plots, hospitals, colleges, and schools. To know about your loan against property eligibility, use a loan against property eligibility calculator and get accurate results in just seconds.