A loan against property is a secured credit option that has considerably grown in popularity. They are multipurpose loans that you can avail from any bank or lending institution just by pledging your property. Owing to their secured nature, lower rates are charged than unsecured credit options. However, like any loan, a loan against property comes with certain facts that many are generally unaware of. Lack of proper knowledge about this product may often result in suboptimal decisions.
Here are 5 important facts that you must be aware of before you apply for a loan against property:
- Lower emphasis on credit score
When evaluating your eligibility for a loan against property, lenders do not focus much on your credit score. This is because the pledged assets in the form of property serve as a backup for lenders when you miss out or default on your EMI repayments.
- No restriction on end usage of fund
A loan against property permits you to leverage your land or property to avail funds that can be used to meet your personal or business needs. No restriction on fund usage makes this option an alternative to top up home loan, loan against credit card and personal loan.
- Higher repayment tenure
A higher repayment tenure of usually up to 20 years is available on a loan against property. As a higher repayment tenure indicates a lower EMI, selecting a loan against property option might help in lowering your EMI burden. However, ensure to take the help of a loan against property EMI calculator to figure out a suitable tenure and EMI as per your repayment capacity.
- Lower interest rate
A lower rate on loan against property is charged as it is backed by a collateral or security. A collateral back up in the form of property lowers lenders’ credit risk concerning you, which makes them offer lower rates. However, ensure not to default on your EMI repayments as continuous defaults may make the lender recover their losses by selling your pledged property.
Loan against property interest rate usually may start from 8.20 percent p.a. while the interest rate for unsecured credit options is often higher. Provision of lower interest rate on loan against property makes it one of the cheapest options to meet your financial mismatches or monetary shortfalls.
- Loan amount based on LTV ratio
Provision of maximum loan amount in loan against property is based on the lender’s LTV ratio. Generally, lenders offer up to 70% of the property’s value as loan, which may go up to Rs. 10 crore.
A loan against property outperforms unsecured loans on grounds of interest rate, repayment tenure and loan amount. However, the option falls short on 2 aspects – document requirement and loan disbursal time. Lenders require several documents for technical study and to understand the market value of your property. Loan against property documents include latest salary slips, bank account statements, Aadhaar, PAN, copy of property documents that you are mortgaging, IT returns etc. In-depth document verifications often increase the disbursal time. Usually, a loan against property is disbursed in around 2-3 weeks. Thus, in such cases, a personal loan or loan against credit card is a better choice if you need funds quickly.