Lending against property implies taking short-term loans from a lender by providing your property (house) as collateral. It is referred to as a Loan Against Property (LAP). This can be a favourable way of accessing funds without necessarily selling your property. However, just like any kind of financial transaction, this involves risks and advantages. This blog post explores the pros and cons to help guide you on whether or not it is suitable for you.
What is a Loan Against Property?
Loan against property is one of the most feasible secured loan options not only for the salaried but also for businesses. This loan is provided when you mortgage your house or commercial property with the bank. This will be based on the current value of that property. You can get a loan against a property which you reside in, and even a land plot you have. However, you must provide the title deed of that property.
Advantages of Loan Against Property
Loan Against Property has various advantages. It provides access to higher loan amounts at lower interest rates, thus proving to be a more cost-effective choice for a person with a healthy credit history and a reliable repayment plan in hand.
- Access to Large Amounts of Money: The most significant advantage of Loan against property is the ability to borrow a substantial loan amount. The loan is secured by your property, and the lenders accept higher amounts than unsecured borrowing.
- Lower Rate of Interest: Secured loans have a lower rate of interest compared to unsecured loans. They minimise risk because the lender will be able to sell the property in case he does not get paid and recover his losses.
- Flexible Repayment Terms: Most lenders will offer flexible terms for repayment, so you can choose an instalment schedule which is most suitable to your financial condition.
- Quick Access to Funds: The procedure to get a loan against property often is quicker than other loans. So, if you have all the required documents, then you can get funds really fast, which is particularly helpful when you need to make a payment urgently.
- Potential for Investment: You can use the funds for any kind of home improvement, purchase some assets for your business, or even clear those debts. It generally increases the value of your property, thus enhancing its long-term benefits.
Risks of Loan Against Property
Although Loan Against Property can offer substantial capital, they carry with them several risks that a borrower should be aware of. Here’s a list of risks of a Loan against the property.
- Valuation Issues: Since the standardised norm for valuation is not present, there may be valuation issues. There will be no uniform norm to calculate the value of the property for which the collateral is being provided. Inconsistencies may cause lenders to adopt different criteria and specific valuation rules might apply to different lenders.
- Control over the Property: In case the borrower fails to pay back his loan, control over the mortgaged property is given to the lender. They may accept a further extension of the loan or sell that property to recover the outstanding amount.
- Default Risk and Repayment Responsibility: If someone takes a loan, then the individual has to return the amount with an interest amount. Defaulting leads to extremely severe after-effects; there could be legal trouble, and your credit history would not remain fine. You stand the chance of losing the property as well. Above all, consider your prevailing financial condition and how stable your income is before getting a loan.
- Interest Rate Fluctuation Risk: If you take a floating interest rate for the Loan Against Property, the risk of increased rates may be dramatically high, which may increase your monthly EMI rates. You need to understand the risk tolerance and opt for the interest rate option, which will work according to your financial objective.
- Legal and Documentation Risks: Other legal and documentation risks associated with Loans Against Property require adherence to legal requirements. It is always wise to involve a legal professional in reviewing loan agreements and documents of property, especially to follow all the laws governing the loan. Due diligence will eventually help in risk assessment and hold your interest.
Conclusion
Loan against property can, therefore, become a viable source of funds for someone who wants to access money quickly and efficiently. As much as it appeals due to the ability to borrow large sums at relatively lower interest rates, caution must be taken in understanding the various risks, such as the potential loss of your property and its impact on your future financial life. It is, therefore, important to think through your financial situation and seek professional opinion for proper guidance. One always has to remember that the potential reward is significant, but the risk is equally substantial; borrowing against property requires one to be cautious in finding success. Additionally, using the best online loan app in India can streamline the borrowing process, but it’s essential to do thorough research to ensure it aligns with your financial needs and goals.