Loan Against Property – Factors to be considered

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With a loan against property, you can overcome any cash crunch, especially that which requires a substantial amount. Whether you are paying for your child’s wedding, financing overseas education or starting a business venture, a loan against property can fund it all. However, the key to a financially stable life is retaining ownership of the property you have pledged, which is much easier to do when you have your priorities in order. Look at all you need to consider when you are taking a loan against property.

Factors to consider before taking a LAP

1. Loan amount and disbursal

Maximum loan amount depends on the valuation of mortgaged property. Lenders provide 50-75% of the property’s market value. While evaluating the market value of the property, lenders take into consideration various factors such as location and age of the property, infrastructure, geographical stability, etc. Post the valuation process, the sanction amount is finalised depending upon factors such as customer’s repayment capacity, credit score, debt to income ratio, etc. The disbursal of loan against property usually takes one week to three weeks.

2. Eligibility

The eligibility of your Loan Against Property depends on the following factors i.e. age, income, existing financial responsibilities, repayment and credit history, and the property value as per the current market rates. You can also include your spouse or child, even if they are not a co-owner of the property as a co-applicant for the loan, to help improve your eligibility.

You need to submit documents to check your eligibility; the documents will involve income and address proof, as well as that of the property.

3. Interest Rate

Being a secured form of loan-backed mortgage, loan against property usually involves lower interest rates, starting at as low as 9.65% per annum. On the other hand, other borrowing options such as personal loan involve higher interest rates, ranging from 10.49%-36%.

4. Tenure

LAP borrowers may find comfortable with the longer tenure offered, but in the long run they end up paying more interest which makes the loan costlier. Before shortlisting the bank/lender understand how much the loan is going to cost. Choose between floating and fixed interest rates by keeping an eye on the fluctuations and predictions of the market. Shop around for lenders who offer competitive interest rates.

5. Repayment Plan

It is still necessary that you plan your repayment in advance and have a strategy in place to repay your borrowed amount. If you want to pay off your debt, you have to make some tough choices. The first of them is which debt repayment option you will choose. There are pros and cons of each option and the one that’s best for you depends on your debt, your income, your monthly expenses, the importance of your credit rating, and how much of the debt you want to pay off.

6. Tax Benefit

Under the Section 37 (1) of the Income Tax Act, you can get tax benefits on the interest paid for your Loan Against Property.Under Section 24

Under Section 24, you can get loan against property tax benefits on the interest paid on your loan if the funds are used for financing your new home. The maximum benefit that you can avail under this section is Rs. 2 lakh.

7. Co Applicants

In case of multiple owners of the property, they all need to be co-applicants when applying for a LAP, because the lender needs to be certain that all owners of the property have agreed to offer the property as security to take the loan. You can also include your spouse or child, even if they are not a co-owner of the property as a co-applicant for the loan, to help improve your eligibility.

8. Processing Fee and Prepayment Charges

Just like other loan options, loan against property also involves processing charges, which is usually up to 2% of loan amount. In addition to this, lenders may levy prepayment penalty for loans lent at fixed interest rates or to non-individuals at floating rates, but floating rate based loans granted to individuals borrowers usually do not attract such penalty due to RBI’s guidelines.

9. Terms and Conditions

Be careful about the add-on charges and penalties. It’s not just the interest that you pay. There are additional charges such as administrative and service charges or processing fees. Also, there are penalties like on pre-payment of the loan. Consider these when comparing the deals offered by various lenders. Reviewing the fine print can help you ensure you are dealing with the right lender; locate any hidden charges that can affect your affordability, and help you stay cautious about any extra expenses you may incur.

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