Involvement of higher loan amount and long tenure makes the decision of choosing the right lender for your LAP even more important
Your property is an asset. You can use it as your home or to earn rent. At the same time, it can also enable you to borrow large sums of money through a loan against property (LAP). It allows you to take a loan amounting to a certain percentage of your property’s market value, with no restriction on end usage. However, to make the most of this loan, consider the following:Take a long-tenured loan and prepay whenever you can
Since a LAP is generally availed for bigger loan amounts, going as high as Rs 50 crore, most lenders offer longer repayment tenures of up to 15 years. Whether you are availing LAP for personal needs or to fund your business, a longer repayment tenure would assist in reducing your monthly EMI but allow you to accumulate a corpus to either make partial prepayments or foreclose the loan in future. Going for shorter tenures would result in higher EMIs, which may financially burden the borrower and increase the risk of default as well.
Although most lenders do not charge for prepayment or foreclosure penalties from individual borrowers like salaried professionals, such charges may be levied on non-individual borrowers such as companies, Hindu Undivided Families (HUFs) etc.
Before deciding upon tenure and planning for prepayment, make sure you take a look at the prepayment charges proposed by the lender concerned. Also, ensure it does not significantly reduce the savings you would be making through pre-payment.Avoid over-leveraging
Similar to other secured loans, LAP allows you to leverage an asset that you already own, in this case a residential or commercial property. However, since LAP involves availability of high loan amounts (up to Rs 50 crore) and lower interest rates (usually starting at 9.5 percent), many borrowers often end up over-leveraging.
Over-leveraging implies borrowing too much, often more than what you can actually repay, thereby increasing the risk of loan default and subsequently, running the risk of losing the property concerned. Remember the lender has the right to recover its dues by auctioning the property, in case the borrower defaults and fails to repay the loan.
Hence, irrespective of the value of the property, you must borrow only what you need and more importantly what you can repay, without straining your finances too much.Compare the lenders on various parametersInvolvement of higher loan amount and long tenure makes the decision of choosing the right lender for your LAP even more important. While comparing various lenders do not limit your research to just the interest rates offered. A lender offering the lowest interest rate may not necessarily be the most suitable choice as per your loan requirements.
Make sure you finalise the lender only after taking into consideration other parameters such as processing fee, prepayment or foreclosure charges, late payment penalty and loan to value ratio. For example, processing fee for LAP varies from lender to lender and may go as high as 2 percent of the outstanding loan amount.
So, ensure you compare all options on all significant parameters.The writer is CEO& Co-founder of Paisabazaar.com