Whether you are a salaried employee or a businessman, the first thought that comes to mind when you are facing a cash crunch is to apply for a loan with a financial institution. There could be various reasons where you would require funds to meet exigencies such as a child’s higher education, a medical emergency in the family, cash flow concerns in the business, or when you plan to expand your business. A loan against property or LAP can be a good option that can aid in meeting your fund’s requirements. Being a secured loan the interest rates offered by lenders are lesser as compared to other loans.
What is a Loan Against Property?
A loan against property is a secured loan where you pledge your commercial or residential property as collateral to the lender in exchange for a loan. It can help a borrower take care of their cash flow needs by mortgaging their property and the higher the value of the property, the higher the loan amount. As long as you can establish the ownership of the property in your name, you are good to go. In case of disputed property offered as collateral or if the documents establishing property ownership are not clear, the chances of loan application being rejected is much higher.
Loan Against Property Benefits
A loan against property is a preferred option while looking for a loan to deal with a cash crunch you are facing as an individual or to address the cash flow issues of a business.
Some of the key benefits of a loan against property are listed below
- Longer repayment tenure - A loan against property is a secured mode of finance that comes with lower interest rates offered by financial institutions as compared to a personal loan. The interest rates could be different for residential and commercial properties.
- Easy availability - A loan against property is fairly easy to avail of, because the lender has a guarantee for the money they are lending. A hassle-free loan approval process and quick sanctions make it a favoured option for the borrower.
- Lower EMIs - A longer repayment tenure means EMIs are spread out for a long period hence the monthly installment amount is nominal. This helps in keeping the EMI repayment easier without affecting your monthly household budget.
- Ownership of the property - A borrower maintains ownership of the property even when using the funds sanctioned through the loan against the property. It allows borrowers to unlock the value of a piece of land he/she owns while still using the property during the loan tenure.
Tips for Loan Against Property
A loan against property can be used for multiple purposes ranging from taking care of medical exigencies to going on a long vacation. Listed below are some important tips to be kept in mind before applying for a loan against a property.
- Evaluate repayment capability - The monthly income of a borrower is one of the major parameters considered while evaluating their repayment capability. Ideally, the EMI amount should not exceed 50% of the monthly income to ensure easy repayment.
- Assess your eligibility - Eligibility criteria for a loan against property can be different for different banks and financial institutions. One of the key pieces of advice to ensure loan approval is to assess your eligibility based on the criteria set by different lenders.
- Maintain a good credit score - A good credit score improves your chances of loan approval and can help in getting lower interest rates when applying for a loan against property. It is prudent to check your CIBIL score before applying for the loan. A good credit score instills confidence in the lender and proves your creditworthiness to the lender.
- Ensure proper documentation - One of the important factors to ensure the loan is approved by the lender is to provide proper documentation. Documents are required to establish the borrower’s ownership of the property against which the loan is being sanctioned. Once received, the lender verifies the property documents to ascertain the market value of the property.
In a nutshell, a loan against property is a viable option to consider when looking for avenues to finance your personal and business-related fund requirements. Multiple benefits such as higher loan amount, longer repayment tenure, and lower loan against property interest rates make it a preferred alternative to a personal loan. However, while applying for the loan be mindful of the fact that defaulting in repayment can affect your credit score and can lead to legal hassles.