One of the most well-known choices for a long-term loan has traditionally been Loan Against Property (LAP). In simple terms, Loan against property is a loan taken from a bank, financial institute, or housing finance company by mortgaging your property as security or collateral. The loan against property has predominantly been seen as a feasible option for a large sum of loans during cases of emergencies.
Regardless of how having easy access to large amounts of funds through mortgaging the property to a bank and lower loan against property interest rates might come off as appealing propositions, it should be noted that LAP, like every loan, comes with its fair share of advantages and disadvantages. So it is essential and firmly advisable for one to watch out for all the points when he’s planning to take a loan against property.
Pros of a loan against property
Advantages of loan against property
- Low rate of interest
One of the most beneficial aspects of LAP is that the loan against property interest rates is significantly lower compared to the other types of loans banks offer. This is due to LAP being a secured loan where you have to mortgage your property as security to the bank. Generally, the rates of interest in these cases range from 12%-15%.
- Low EMI amount
The longer the term or tenure of the loan, the lower will be your EMI. In the case of a loan against property, the EMI is conversely proportionate to the term, and thus, if you select a longer repayment period, you will be paying lower EMIs.
- Ease of securing the loan
Securing a loan is a daunting task that takes a lot of time, and the pressure of failure is always high. But that does not happen in a loan against property. With your property as a mortgage, there are many competitive banks you can choose from to cater to the needs aptly.
- Easy prepayment of the loan
When it comes to foreclosing any type of loan before the completion of its tenure, many banks charge a prepayment fee. However, in the case of a loan against property, most of the banks do not charge such a fee, and if they do charge it, the amount is fairly low.
- Longer tenure period
If we compare a loan against property with personal loans, LAP is usually given for a longer time period, so you have sufficient time to repay the loan. The tenure for LAPs ranges from 5-15 years based on the funds sanctioned.
Disadvantages of loan against property
- Rigorous scrutiny and verification process
In the case of a LAP, the processing time to finalize the loan is quite long. Banks carry out a thorough background check on the loan applicant as well as scrutiny of the legal ownership of the property. The whole process can sometimes be very time consuming and exasperating at times and can be a huge drawback.
Banks usually carry out verification regarding the applicant’s credit score, repayment abilities, employment guarantee, etc.
- Risk of having property seized
Even if the repayment tenure for a loan against property is significantly longer, some may find it hard to close it nevertheless. In such cases, the bank has a legal right to seize the mortgaged property to recover the loan given, including the due amount from the loan against property interest rates.
- Diminished valuation of the property
Since the bank that lends the money to the borrower appraises the value of the property, they generally specify a lower value for the same. This results in you getting approved for a lesser loan than the actual fair market value of the property. The usual estimation is done at 70% of the fair market price of the estate.
- The loan amount is not stipulated prior
Unlike in case of the personal and other loans, the banks do not stipulate the loan amount in the case of LAP. Rather, they evaluate your property first, which provides a base on which the loan amount will be sanctioned by the bank later.
With proper analysis, it becomes evident that the advantages of a loan against property are more than their cons. However, it is equally true that you have to be quite diligent in repaying the loans on time to avoid getting the property to be seized by the lender. Since the risks are higher, too, you must consider the circumstances and urgency for funds.