Any individual, salaried or self-employed, who owns a property, whether residential, commercial or even a piece of land, can take a loan against that property. This product offering by banks is called a loan against property (LAP). LAP is a secured loan wherein an individual pledges his owned property as collateral to the lender, generally a bank or a non-banking financial corporation. However, just like in any unsecured loan, this type of loan also works on similar principles of borrowing funds for a specific tenor and at a mutually agreed interest rate.
As the name implies, the property is the main underlying asset and hence, the loan amount primarily depends on the value of the property pledged as collateral. The property you are willing to pledge in exchange for a loan should have a clear title, be free from any legal issues, and shouldn’t have any running loan against it. Since this is a secured loan (as your property serves as collateral), the risk exposure of the lender is relatively low compared to an unsecured loan, and hence, banks can offer the loan on better conditions to the borrowers. The biggest benefit of a loan against property is that the interest rate is lower than that of personal loans. Further, LAP can be opted for a tenor of up to 20 years. Hence, if your requirement is of a large loan amount, LAP will anytime be a better option over an unsecured personal loan.
- Loan Eligibility
A loan against property eligibility depends on various factors, such as the capability of an individual to repay EMIs, their past credit history, and their CIBIL score, which must be more than 700 points. As far as a loan against property documents are concerned, one needs to arrange for personal identity documents, such as a PAN Card, Aadhaar Card, Voter ID, etc.; address proof documents, such as ration card, passport, Aadhaar card etc.; and employment documents, bank statements, IT returns and most importantly, property documents proving the ownership.
In case you do not have any income proof, don’t worry. You can still avail of a loan against property. All you need to do is apply for LAP with a co-applicant with a good credit profile and relevant income documents. You can speak to a tax consultant and provide a valid reason to the bank for not filing IT Returns. Show your bank statements to the lender to prove your timely repayments and good credit history. If the lender gets convinced with the aforesaid actions, then chances are your application for a loan against property without income proof will get accepted. Further, borrowers must always remember that the higher the CIBIL score, the better is the negotiating power one has over interest rate discussions with the lender.
- EMI Affordability
The loan against property EMI calculator helps to evaluate the monthly payments that one would incur on their loan amount. Available on every lender’s website, the loan against property interest rate calculator helps one arrive at the right EMI that doesn’t significantly increase one’s mental or financial burden. By filling the details of principal loan, tenor and interest rate in the calculator, one can easily gauge his/her future repayments on the loan amount. They can also adjust the values in the calculator as per their requirement. The calculator, therefore, helps one shortlist the lender offering a loan on the best possible conditions.
- Interest rate comparison
Loan against property interest rate tends to vary from bank to bank and is dependent on various other factors, such as age, property, value, etc. To get a loan at the lowest possible interest rate, always compare the rates offered by different financial institutions. In addition to the interest rate, also compare other benefits, such as processing fees, prepayment charges, and any other charges. Finally, opt for a bank that provides the best overall terms and conditions on the loan.
- Fixed vs Floating Interest Rate
If the interest rates in the market at the time of availing loans are low, and you feel that they are likely to rise in the future, then you should take advantage by opting for a fixed-rate loan and safeguard yourself against increased EMIs and interest costs. It is worth mentioning that the interest rate applied at the time of availing of the loan will remain unchanged through the tenor in a fixed-rate option. In contrast, under a floating rate, the interest rate on the loan moves in line with shifts in market interest rates. A floating rate proves beneficial in a high-interest rate environment as you can reap benefits when interest rates move lower.
- Shorter Tenor and Regular Repayments
The higher the tenor of the loan, the higher is the total interest cost you’ll bear through the loan cycle. Hence, always try to opt for a shorter tenor and pay more EMIs to reduce the total interest burden. Making regular pre-payments, particularly in the initial years, will not only reduce your outstanding loan amount quickly but will also reduce the interest paid on the loan amount.