A Loan Against Property in India is a secured loan granted by a financial organization to a borrower using their property as collateral. The property can be residential or commercial, and the loan amount is typically a percentage of the property’s market value. In India, LAPs have become a popular funding source for individuals and businesses needing financial assistance. This article will provide an overview of LAPs in India, including their benefits, risks, and requirements.
Benefits of Loan Against Property in India
Higher Loan Amount
LAPs in India typically offer a higher loan amount than other types of loans, such as personal or credit card loans. This is because the loan amount is determined by the property’s market value, which is usually higher than the value of other assets that may be used as collateral.
Lower Interest Rates
LAPs typically have lower interest rates than other unsecured loans. This is because the loan is secured against the borrower’s property, reducing the risk for the lender.
Longer Repayment Tenure: LAPs in India usually come with a longer repayment tenure, ranging from 5 to 15 years. This gives borrowers more time to repay the loan and reduces the burden of monthly repayments.
Flexible End-Use
The funds obtained from a LAP can be used for various aspects, such as business expansion, education, or medical expenses. This flexibility allows borrowers to make the most of the funds per their needs.
Easy Approval Process
The approval process for a LAP in India is typically quick and straightforward, with many lenders offering online applications and fast approvals. This can help borrowers access the funds they need quickly and efficiently.
Tax Benefits
Interest paid on a LAP in India is tax-deductible for self-occupied properties, and for let-out properties, the rental income can be offset against the interest paid.
No Prepayment Penalty
In many cases, borrowers can repay the loan before the end of the repayment tenure without incurring any penalties. This provides borrowers with additional flexibility and can reduce their overall loan cost.
Risks of Loan Against Property in India
Foreclosure
The risk of foreclosure is a significant concern for those taking out a Loan Against Property in India. Foreclosure is the process by which the lender can take possession of the property used as collateral and sell it to recover the outstanding loan amount. This can result in significant financial losses for the borrower and damage their credit score, making it more difficult to obtain financing in the future.
Increased Debt Burden
LAPs can make borrowers more indebted because they are now accountable for repaying the loan along with any interest. Borrowers may find it challenging to pay off their debts and maintain their level of living as a result.
Decreased Liquidity
The property used as collateral for a LAP is no longer available for sale or use as collateral for another loan. This decreased liquidity can make it difficult for the borrower to access additional funds in the future.
Negative Equity Risk
Negative equity occurs when the collateralized asset’s value drops below the loan’s balance. The borrower may have a more challenging time paying back the loan or selling the property if the borrower is forced to make up the gap between the loan amount and the property’s value.
Which Is Better: Fixed or Floating Interest Rates?
In the event of a fixed rate, as the name suggests, the interest rate is set for the duration of the loan on property or for a certain period of time and never changes. This provides financial protection for the buyer from interest rate changes. The buyer is no longer entitled to the benefits of lower interest rates in the event that the bank’s interest rates decrease. However, the buyer is not required to pay the higher rates if the rates increase.
Under a floating rate, the buyer is still responsible for paying the interest rates, which may occasionally change. The buyer gains from rate reductions and bears the burden of any rate increases. More than once a year may see a revision to floating rates.
The loan against property interest rate charged is a significant deterrent to taking out house loans with fixed rates. Floating interest rates are significantly lower than fixed interest rates. The cost of borrowing varies from borrower to borrower and from lender to lender. Interest rates rely on several parameters, including credit score, employment status, pay structure, etc.
Requirements for Loan Against Property in India
Eligible Properties
The property used as collateral for a LAP in India must be a residential or commercial property owned by the borrower. The property must be located in India and free of any encumbrances or legal issues.
Borrower Eligibility
To be eligible for a LAP in India, the borrower must be an Indian resident and have a steady source of income. The borrower must also be at least 21 years of age and have a good credit history.
Documentation
The lender will require several documents from the borrower, including proof of identity, proof of income, and proof of property ownership. The lender may also require a detailed report on the property’s market value and any outstanding debts associated with the property.
Conclusion
Loan Against Property in India can be a valuable source of funding for individuals and businesses needing financial assistance. However, it is essential for borrowers to fully understand the benefits and risks of the loan before making a decision. Borrowers should also compare offers from different lenders and consider their financial situation before taking out a LAP.
