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Loan against property: Scout for reasonable interest rates, easy repayment terms

Your property can be used to get a loan. But make sure you are not being charged a high interest rate. Loans availed by mortgaging your property can be used for any purpose, just like a personal loan. But unlike any loans, be ready for a bit of a delay as your bank will undertake a thorough evaluation of your property and decide your eligibility amount. A healthy credit score helps.

November 01, 2022 / 09:11 AM IST

At some time or the other in one’s personal or professional life, a cash crunch may pose unforeseen challenges. This could be due to a personal or business exigency that requires quite a lot of funds.

In such situations, taking out a loan against property (LAP) may be a worthwhile option, since it offers the chance to borrow a higher amount compared to other types of loans. Also, this is more beneficial than unsecured credit, such as personal loans, which come at a higher rate of interest. LAP is particularly useful when a substantial sum is required to tide over a cash crunch.

To elaborate, LAP represents a secured loan that is given after the prospective borrower pledges his or her residential, commercial or industrial property as collateral. Such collateral must be self-owned, along with a marketable and valid title.

LAPs can be used for multiple personal or professional purposes such as business expansion, medical emergencies, marriage, higher education of offspring, and more. While disbursing the LAP amount, a borrower’s income, credit history and the property’s present value are considered to assess eligibility.

In opting for LAP, a few critical factors should be noted. These include:

Realistically assessing one’s ability to repay

Do not forget that pledging one’s property carries an inherent risk of losing it if repayments are not made in time every month. Therefore, borrow only an amount where the equated monthly instalments (EMIs) can be repaid easily since a default could have unwanted consequences.

Comparing interest rates

LAP interest rates vary from 9-18 percent, depending on numerous variables, including the lender. Different lenders can charge varying interest rates based on the applicant’s risk profile and other factors. A comparison helps borrowers decide the best.

Checking out the processing fees

While most lenders charge 1 percent of the loan amount as processing fees, they may cap these charges at a specific amount, which may vary from Rs 50,000 to Rs 1.5 lakh. Borrowers should check these details and choose the right processing fees, keeping the overall loan commercials in mind.

Going with the right tenure

Typically, most lenders offer 15-year tenures for LAP, although some go up to 20 years. The tenure impacts the EMIs as well as the total repayment outgo. A shorter tenure denotes higher EMIs but minimises the total repayment, while longer tenures mean lower EMIs, but higher overall repayment due to the extra interest paid. A lower tenure is advisable if repayment isn’t an issue.

Knowing that LAP disbursal is time-consuming

LAPs are not given speedily like instant personal loans. Besides ascertaining the borrower’s creditworthiness, the property will be properly evaluated, which can take a few weeks. When opting for LAPs, disbursement delays need to be considered.

Discovering the property value

A better deal can be availed from private lenders in this way since they usually offer up to 75 percent of the property value. Conversely, public sector banks may only give up to 65 percent of the property value. Prior property value knowledge helps.

Choosing between fixed and floating interest rates

Minor fluctuations in interest rates don’t sound like a major concern. But over the long haul, these can pinch due to the increased tenure. So, it makes sense to decide on the right interest rate option by understanding the current market dynamics. For example, in the current market scenario where rates are expected to increase further, it is advisable to go for fixed rate loans.

Undertaking due diligence of lenders

Since interest rates and terms can differ between lenders, this impacts the EMIs and total repayment. In this case, comparing all parameters between lenders is essential in knowing the best option. In the digital era, credible lenders mention the rate of interest and other terms on their websites. Browse these websites, compare individual norms, and then decide.

Finding out about prepayment and other ‘hidden’ charges

Generally, LAPs represent big-ticket loans. Higher processing fees and allied charges can inflate the total borrowing costs. Check prepayment charges for foreclosing a loan before the tenure concludes. These charges should be reasonable to make loan foreclosure viable. Consider such factors before finalising the lender.

Evaluating existing liabilities before availing of LAP

A borrower’s existing liabilities and the debt-to-income ratio should not be more than 60 percent. Otherwise, lenders may not approve a loan since repayment can be an issue.

Moreover, a property must be without encumbrances to avail of LAP. Unlike personal loans, through LAP one can raise a higher amount of funds at a lower rate of interest, much like top-up home loans, although top-ups require an ongoing home loan. But LAP interest rates could be two percentage points higher than a top-up loan.

Borrowers should also ensure they have a healthy credit score since lenders will then offer competitive interest rates. Finally, borrowers should be well acquainted with the terms and conditions of lenders and probe if there are any hidden charges before signing up. If it is difficult to comprehend any financial jargon or specific clauses, request clarification on the same.

Awareness and adequate due diligence before signing up with LAP lenders can help borrowers obtain credit on comparatively better terms.
Pankaj Bansal is Business Head-Secured SME, Clix Capital