These days, financial institutions offer several different types of loans. A loan against property (LAP) is one such product that can be availed of by an individual, especially those who require relatively large sums of money. LAP is a type of loan that can be obtained by a borrower who owns the property and is willing to pledge it as collateral to the lender. As the name suggests, a loan against property is a secured loan, and since the loan is offered against a property, the risk to the lenders is relatively low compared to a typical unsecured loan. This makes it easier for lenders to offer competitive loans against property interest rates. A borrower can seek LAP either for expansion of business or to fulfil any other personal financial obligations, such as medical emergencies, funding a child’s education, and marriage.
LAP loans can be availed of by salaried and self-employed individuals against property, be it residential, commercial, or even a piece of land. The important aspect to note is that it should be free from any legal dispute and shouldn’t already have a loan running against it. A loan against property can be availed of for a tenor up to 20 years, making it easier for the borrower to manage his finances without excessive burden, mental or otherwise.
Few Things to Watch out for When Taking a Loan Against a Property
- Know Your Eligibility Before Applying for LAP
Knowing whether you are eligible before applying for a LAP loan will not only help you fasten the approval process but will also help you avoid rejections. The eligibility criteria for LAP depends on various factors, such as the repayment capability of the borrower, their age group, income level, loan repayment history, and CIBIL score. Several ongoing loans may not be good for your LAP application as they may create doubt for the lender regarding your repayment capacity. If you are planning to opt for a loan against property, try and close your one or more running loans to improve your credit score. A good CIBIL score (generally of more than 700 points) helps one negotiate and get the lowest possible loan against property interest rate.
- Do Not Over-Commit on Loan
In LAP, lenders usually offer a loan amount of up to 70% of the property value that a borrower offers as collateral. This doesn’t mean you should always opt for the maximum loan amount – avail of only how much you need to fulfil your objectives as the EMI and interest is calculated on the entire loan amount you have availed and not on how much you have utilised, unlike in the overdraft facility. In other words, you would end up paying interest and a higher EMI instead of earning interest on the amount you would have saved by opting for a lower loan amount. The LAP EMI calculator can help you evaluate how much EMI would be paid on a particular loan amount, interest rate, and tenor.
Example: If your property is valued at 50 lakhs for LAP and you need only Rs.30 lakhs then the EMI on Rs.50 lakhs for 10years at a 10% interest rate will be Rs.73,890 and for Rs.30 lakhs, on the same tenor and interest rate will be Rs.44,334. The difference of Rs.29,556 in EMI can be instead used as savings or investments in other schemes. You can do this calculation with a simple click using the LAP EMI calculator.
- Avoid Opting for a Long Tenor
Since Loan against property can be availed of for a long tenor, a borrower may get comfortable with the thought of choosing a longer repayment tenor to lower the EMI burden. However, do not forget that the longer the tenor, the more amount you’ll end up paying in interest to the lender. Hence, if possible, always go for higher EMIs over longer tenors.
Example: Sudha opted for a LAP of Rs.50 lakh for a tenor of 18 years at an interest rate of 11%. She paid an EMI of Rs.53,252 and her total interest paid was Rs.65,02,746.
If she would have opted for a LAP of Rs.50 lakh for a tenor of 15 years at the same interest rate then her EMI would have been slightly higher at Rs. 56,830 but the total interest paid would have been Rs.52,29,337.
Therefore, reducing the tenor by just 3 years can save you a large amount of money, in this case, Rs.12,73,409.
Don’t Forget to Compare Loan against property Interest Rates
When you decide to go for a Loan against property, the first thing that you must do is compare the terms & conditions offered by different lenders. As the EMI depends on the LAP interest rates, it is important to go for a lender who offers a low interest rate along with flexible repayment terms. Other terms & conditions like processing fees and prepayment charges are also important points to be considered before applying for a LAP.
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