Most important factors of loan against property you should know in 2022

A loan against property can benefit you if you plan to expand your business. A loan against property is ideal for businesses of all sizes, whether they need the money to pay employees or suppliers, stock merchandise to meet rising demand, or pay for operating costs.

Due to a secured status and lack of end-use restrictions, loans against property have been in extremely high demand. A loan against property is a loan that financial institutions provide against existing property. Other loan types, including project, personal, and company loans, fall short compared to loans secured by a property. It happens because you can get a larger loan at comparatively lower interest rates. 

Although taking out a loan against property in 2022 is very simple, there are some factors you should be aware of. 

Thinking of getting a loan against property? Take the following factors into account.

Property valuation and an appraisal are performed.

The lender will determine how much principal amount you can take as a loan against the property. It depends on the value of your property. The lender will first check and access your property. After this, they will run it against a value proposition and give it a valuation.

NBFCs check the paperwork to ensure the current status of the property. They also review documents to ensure the property is freehold, new, and has a clear title. Co-owners can also participate in the process to increase their eligibility.

If all goes according to plan, the loan will be approved between 50% and 70% of the market value (of the property). To measure the market value, use the Loan-to-Value (LTV) ratio determined by the lender. 

Interest rates are lower.

Compared to business and personal loans, which are unsecured, loan against property (LAP) loan amounts are issued at lower interest rates. This is because LAPs come with security as you pledge property as collateral. Due to this, the interest rate will be lower with better loan security and a smaller margin amount authorized. It lessens the likelihood that the lender will suffer significant financial losses in the event of non-repayment.

You can further decrease the interest rate by following specific guidelines. You can convince the lender to provide you with an overdraft and credit limitations on your LAP. Then, you will only have to pay interest on the amount you use from the loan rather than the entire sum.

In addition, the policies of the lender you apply to will determine the interest rates. It will be based on your credit history, income, and other factors. Additionally, you will have to choose between floating or fixed interest rates.

Fees and processing times should be considered before applying.

Depending on their terms and conditions, processing fees are applicable on every LAP sanction by the lending banks. Processing fees might be between 0.5% and 3% of the approved loan amount. After approval, this could be charged upfront or subtracted from the loan’s principal.

Stamp duty fees and convenience fees for changing interest rate structures could also be assessed. To calculate the actual loan cost, you must also consider the prepayment penalty and foreclosure costs.

A LAP also takes longer to process than a personal loan, which may often be done in a few days. The reason is simple: lenders inspect the property for encumbrances and conduct a valuation assessment.

Loan duration and repayment options are available.

The loan’s duration is also a significant consideration to take into account. Lending institutions typically give loans ranging from 5 to 15 years. As long as the applicant repays it before they retire, the period can go up to 20 years. Therefore, if you are a paid individual in your 40s searching for a LAP, you can take a loan with a 20-year term, presuming you will retire in your 60s.

Find the right balance to balance the loan’s term and your EMI payments. It is crucial if you choose a loan with fluctuating interest rates because it would consider the compounding effect. Even though extending payments over time lowers the monthly EMI burden. A longer tenure may result in higher interest payments overall. Through a shorter loan tenure, you can ensure interest cost reductions.

There are tax advantages.

Unlike personal loans that have no tax benefits, LAP is more attractive. LAP provides you with better interest rates, and you can also get tax benefits.

As per the Income Tax Act, a person who earns through salary can avail of interest exemptions. However, it is only possible when you use the loan to purchase a new home. Similarly, certain benefits are also given to business owners as tax rebates for the interest they paid against LAP.

Having a thorough understanding of the lender’s requirements is necessary.

Your eligibility for a LAP depends on the specific standards of that financial institution. For example, for a loan of Rs. 50 lakh, bank A might demand that you need to be 25 years and above, whereas bank B might need you to be 21 years old before they grant you a loan of Rs. 30 lakhs. Understand the requirements of the lender to determine if you qualify.

Credit (CIBIL) score will be checked.

A high CIBIL score is crucial when the lender assesses the LAP. To get low-interest LAPs, you should have a strong credit score, typically over 750. Start making on-time EMI payments. Also, utilize less than 30% of any credit limit given to you to raise your credit score.

Conclusion

Aspects like interest rates, how you handle payments, and loan tenure are important before selecting a LAP sanction. Your age, income, payment history, and creditworthiness will affect the loan terms. Therefore, it’s necessary to investigate and assess each LAP financing alternative.

Piramal Finance is the best option if you are looking for a reliable and trustworthy lender. The company offers LAP loans for all your needs through a user-friendly online application process. Moreover, all the loans come at affordable interest rates with flexible payback schedules.