A loan against property or LAP is a secured credit option that HFCs (housing finance companies), banks and NBFCs provide against commercial or residential property. These loans generally are provided at a lower rate of interest as compared to a business loan or personal loan and are disbursed at a reasonable time. If you have a property, you can avail such loans, whether you are self-employed or salaried for any purpose. The Quantum of the sanctioned loan is even higher than what might be provided in other credit options.
Demand for SBI LAP or HDFC LAP is rising among individuals owing to 3 primary reasons:
∙ LAP is cheaper than a personal loan.
∙ Applicants can remain the owner of the property despite pledging it against the property.
∙ Loans can be used for various purposes like children’s higher education, medical expenses, and marriage or for setting up a business.
Besides this, existing consumers of HFCs or banks need not review your document for the verification process again.
A loan against property, may it be SBI Loan Against Property or HDFC LAP, is a boon for both the salaried and business owners. Those self-employed seeking funds for business expansion can make good use of the facility. The salaried professionals witnessing sudden healthcare crises that might require long-term medical treatment involving costly surgery or sending kids to foreign universities for higher education can avail facilities for raising funds. LAP not just leaves your savings intact but even comes with low-cost EMI at a repayment tenure of up to 20 years. A low rate of interest on such loans helps dilute your repayment burden.
A loan against property allows you to leverage your land or property for raising your funds to meet your business or personal requirement without losing out on property ownership. As it is secured in nature, the interest rate on loan against property is lower than unsecured credit options, and lenders often are less stringent towards credit score when evaluating your credibility. However, this ease of approval generally makes many avoid a few vital facets.
Discussed here are specific crucial aspects that usually you must consider when placing an application for LAP.
Compare the interest rate of distinct lenders.
An interest rate of an SBI, HDFC Loan Against Property ranges anywhere from 8.20 percent to 14.50 percent, depending upon the lender and their examination of their risk concerning your credit profile. LAP’s interest rate might differ based on the loan amount and loan tenure that applicants opt for. Thus, if you plan to take up a loan against property, you must initially compare the LAP offers from various lenders. You must begin your hunt for LAP by initially visiting the HFC or bank with whom you hold an existing banking relationship. Next, you should visit the online lending markets to compare the LAP offers being offered by other lenders. The final LAP application must be with the lender charging the lowest interest rate for optimal repayment tenure and loan amount.
Factor in prepayment and processing charges
Besides loan against property rate, processing charges incurred by the lenders are the next important factor you must consider. Processing fees that are charged by most lenders usually range between 1 and 2 percent of the loan proceeds. As the loan option includes big-ticket loan proceeds, their processing charges too might be a considerable amount. Hence, applicants must always make sure to consider their processing fees before making a final application with a specific lender.
As per the RBI guidelines, LAP availed on floating interest rates come with zero prepayment fees. However, lenders who offer LAP on fixed interest rates may charge foreclosure and prepayment fees. As choosing the prepayment route on fixed-rate LAP can cost a massive amount, ensure to consider floating interest rate LAP. Doing so might allow you to avail prepayment option without the need to pay any fees as prepayment charges.
Choose loan tenure depending upon the repayment capacity
The loan tenure of any loan option plays a crucial role in determining the EMI and overall interest cost. Higher repayment tenures result in lower EMI but lead to higher interest costs. The opposite is true in the event of a loan available at a shorter tenure. As LAP tenure can be up to 15 or 20 years based on the lender, you must select the LAP tenure depending upon your repayment capacity. Select shorter tenures only if you are thoroughly sure about meeting your EMIs on time without any need to compromise on your contribution towards crucial goals.
Those who cannot stick with a higher repayment tenure to meet lower EMI because failure to mitigate timely EMI can result in steep penalties, which negatively impact your score and your credit card and loan eligibility prospects. Those applicants selecting a higher repayment tenure always have the choice to open lower interest costs by choosing prepayments on availing surplus funds.
Factor in disbursal time when availing loan
Loan against property disbursal usually takes nearly 2 to 3 weeks as the lenders need to verify your property documents and conduct a technical study for assessing your property’s market value before approving your LAP application. Thus, LAP might not be the correct match for you with instant fund needs. Such applicants, instead of availing of LAP, must choose a personal loan or other loan options with a lower disbursal time.
Consider the LAP EMI in your emergency fund.
Financial emergencies like illness, job loss, accident, etc., are generally uncertain in nature and hit anytime, which may impact your cash flow, income, and your repayment capacity. While you always can depend on your existing investments to repay your loan EMI, doing so can negatively affect your long-term financial health. To mitigate such risk, applicants should also make sure to consider their existing EMIs in your emergency fund. Remember that an emergency fund must be sufficient to meet your unavoidable expenses for around six months or more. Thus, when you start with your LAP plan, make sure to simultaneously enhance your emergency fund by nearly 6 times your expected LAP’s EMI.