When we need money to meet urgent needs, the first thing we think of is a loan. However, some people find it difficult to decide which loan to apply for or whether a loan against property is a good idea. While some concerns may be justified, financial experts say that a loan against property is one of the most secured loans and carries a lower interest rate compared to other options. It allows us to use the value locked up in a property while continuing to occupy the property during the loan period.
Advantages
A loan against property allows borrowers to use the money for various personal as well as business purposes, such as setting up ventures or expanding it to meet sudden medical expenses. This loan is also relatively easily available as lenders get a guarantee for the money they lend. It is in high demand because people get to borrow a large sum (up to 70 per cent of the property value), have flexibility over payments and the interest rate is lower compared to other loans. The loan repayment tenure can be long, resulting in lower EMIs.
Tax benefits can be availed on the interest amount for a loan against property and generally, lenders don't levy penalties on earlier payment of the loan amount.
Disadvantages
The waiting period to secure the loan is quite long and can be frustrating as lenders do a background check on the applicant to ensure the candidate is legitimate. Banks and other financial institutions also check the applicants on their credit score, repayment capabilities, and other parameters, which are again time-consuming. Another problem could be the valuation of the property to be pledged as collateral. Different banks value properties based on different parameters, there is no set standard/pattern.
The biggest risk, however, is that the lender has the sole authority over the property pledged in the event of the borrower failing to repay the loan on time. The lender can restructure the loan or sell it to recover its money. It can still claim the remaining dues if any.
Other factors
The lender also considers the age, occupation, and income of the applicant to determine its vulnerability and the interest rate. The interest rate may differ for commercial and residential properties, and the age and location of the property can also influence the approved amount or interest charged on it.
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