A loan against property has been an age-old concept. When you need money, you can pledge your residential or commercial property to the lender in exchange for a certain amount of money. You repay the amount in instalments to the lender. The property, also called collateral, can be taken back when you repay the entire loan amount and the interest.
Today, however, the procedure is structured and more formal. Banks and NBFCs lend money which can be put to a flexible end-use. Despite the simplicity of the process, there are myths about loans against property. Most Indians prefer to discuss property matters with friends and family, which can lead to misinformation about loans against property advantages and disadvantages. Listed below are some of such myths and the truth behind them.
Myth #1: I cannot use my property once I pledge it.
One of the biggest myths about loans against property is that you cannot use the property that you have pledged. As long as you do not default on your repayments, this will not happen. You have to submit the original property documents to the lender, but the rights to use the property remain with you.
Tip: Before you apply for a LAP, ensure that your paperwork is complete and that the property is not under any dispute.
Myth #2: I can use the funds only for restricted end-uses.
This is nothing but a myth. Just like a personal loan or a loan against gold, you can use the loan amount for any financial need that you have. From your wedding to your child’s education, from planning a foreign holiday to expanding your business, you can use the money for anything you want.
Myth #3: I can get a full property value loan.
The loan to value, LTV, is actually never 100%. Based on the value of the property you are pledging, the lender will decide on the loan to be sanctioned. Most banks and non-banking financial companies offer a loan amount up to 70% to 80% of the property’s tidal value. Apart from this, the age of the property, its location, its infrastructure etc., also affect the LTV.
Tip: Find out how much loan amount can you get from a lender, compare it with a few others and choose the best option.
Myth #4: I have to pay a high-interest rate for a loan against property.
Again, a common myth about loans against property . LAP is a secured loan, and thus, the interest rate depends on a number of factors such as your credit score, your monthly income and your repaying capacity. A score of 750 and above can help you get a loan faster and at better rates.
Myth #5: Taking a loan against property is dangerous.
If you fulfil the loan eligibility criteria, taking a LAP can bring you no harm. When you pay the loan amount in time, your property will never be at risk. You will get the property papers back as soon as you pay the loan amount. So, the common myth that taking a loan against property can put you at risk is not really true.
Tip: When opting for a LAP, choose an EMI that you feel you’ll be able to pay off easily. Not paying your due instalment can negatively impact your credit score and put you at risk. Opt for a longer tenure if needed.
Myth #6: Pre-paying a loan against my property will be very costly for me.
This is not really true. Yes, just like other loans, there are pre-payment charges in loans against property as well. But with time, the charges get reduced. Some banks may charge you with a pre-closure fee, while some may not.
Tip: When you choose a lender, it is crucial that you understand all the terms and conditions related to the loan and repayment. Make sure you go through the policy documents and do not miss any concealed fees and charges.
Myth #7: The loan can be taken only against my residential property.
Absolutely false! One of the biggest advantages of a loan against property is that you can get one against your commercial as well as residential property. Your property will qualify you for LAP.
Myth #8: When opting for a LAP, I should simply opt for the lowest interest rates.
No, you must not. No matter how tempting it may seem but you need to check all the fees and charges that you will have to pay during the loan repayment. Pre-payment of a loan often comes with a charge. A financial institution offering a lower interest rate may levy higher charges for other services.
Tip: Keep in mind that going for the lowest rate of interest is not the best option. You need to check for hidden costs as well.
Myth #9: A high CIBIL score will guarantee me a LAP.
Sadly, no. There’s no denying that a credit score over 750 will make getting a loan against property much easier and simpler, but it surely cannot guarantee that you will get a loan. There are other important factors that make you eligible. Your repayment capacity, the value of your property and the legalities of your property play a crucial role here.
Myth #10: I should be in a high-income bracket to get a LAP.
This is another common myth about loans against property. Even with a moderate income, you will be able to qualify for one. Loans against property can be taken by salaried as well as self-employed individuals. Apart from good credit history, if you have low liabilities and the value of your property is high, getting LAP will be easier. If you have been a long-associated customer, your credit etiquette will also affect the loan disbursal.
Myth #11: I can take a LAP only for short durations.
No, not really. As a loan against property can get you up to INR 1 crore, repayment is generally not for a shorter tenure. However, the loan duration depends largely on the terms and conditions and policies of the lender. Some banks/ financial institutes also loan for up to 20 years as well.
Educating yourself and being aware of the various aspects of LAP will help you differentiate between myths and realities. If you still have any concerns in mind, speak to a financial expert who will help you in making the right decision.
A loan against property can be a useful financial tool that can come in handy, be it a personal or business requirement. The interest rates are affordable, and the loan procedure is rather simple. Make sure you weigh the advantages and disadvantages of a loan against property before deciding.