Loan against property (LAP) allows you to leverage your immovable asset to raise funds for personal or business purposes, without losing the ownership of your property. This makes LAP a popular credit option, especially among property owners, for raising big-ticket loans or meeting cash flow mismatches.
Let us discuss about some of the factors we must consider before applying for a loan against property.
Interest rate
The interest rate of LAP can range between 8.15 percent to 13.2 percent a year, depending on the lender and their risk assessment of your credit profile. Some lenders tend to offer lower interest rate for self-occupied residential property vis-à-vis rates charged for commercial properties or properties that are not self-occupied. Interest rates may also vary depending on the loan amount and tenure opted by the borrower.
Repayment tenure
Most lenders offer repayment tenure stretching up to 15-20 years for loan against property, which is comparatively longer than other loan options like gold loan, personal loan and top-up home loan. Gold loan’s repayment tenure can extends up to 3 years whereas top-up home loan is offered up to the residual tenure of the underlying home loan or up to 15 years. The tenure of personal loan is on the shorter side, ranging between 1-5 years for most lenders.
Keep in mind that a shorter tenure would imply higher EMI pay out but lower interest cost whereas a longer tenure would result in smaller EMIs but higher interest cost. Hence, factor in your repayment capacity and monthly commitment for crucial financial goals while choosing the loan tenure. Also, try to prepay your loan to reduce overall interest cost whenever you have surplus funds.
Also read: Kotak Mahindra Bank and State Bank of India offer the lowest rates on home loans
Loan amount
Lenders usually provide up to 50-70 percent of the property’s market value as LAP, depending on the applicant’s repayment capacity, income, property to be mortgaged, etc. Keep in mind that while evaluating the market value of the property, lenders take into consideration various factors such as location and age of the property and surrounding infrastructure.
No restriction on end usage of funds
Just like personal loan, top-up home loan and gold loan, lenders do not place any restriction on the end usage of loan proceeds of LAP, except for illegal or speculative purposes. The fund can be used for diverse purposes such as child’s higher education, business expansion, new property purchase and medical treatment.
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Processing time
Disbursal of loan against property usually takes around 1-3 weeks, considering that lenders verify all property related documents before disbursing the loan and undertake a technical study to confirm the ownership of your property and its market value. Hence, LAP may not suit those looking for quicker access to funds.
Processing fees
Most lenders charge 1- 2 percent of the loan amount as processing fee. Given that LAP usually involves large loan amount, its processing fee may constitute a sizeable amount. Hence, LAP applicants should compare the processing charges charged by various lenders before making the final application.
Prepayment charges
RBI guidelines bar lenders from charging prepayment penalty on LAP offered on floating interest rates. However, lenders may levy prepayment charges to prepay LAP on fixed interest rates. Hence, making prepaying fixed rate LAP can cost you a considerable amount. Consider opting for floating rate LAPs over the fixed ones to keep loan prepayment option open in future without incurring any penalties.
Conclusion
The interest rate, loan tenure, processing fee, LTV ratio, etc of LAPs offered by various lenders can vary widely depending on your property, credit profile and risk appetite. Hence, compare loan options extended by as many lenders as possible before zeroing on any particular entity. Start the process by contacting banks and NBFCs/HFCs with which you have existing banking or lending relationship. Follow it up by visiting online financial marketplaces to compare various loan offers available.
