Pledging property to avail of a loan has become inherently common among borrowers in India. Whether you need to finance your or your loved medical treatment or pay for your children’s higher education, you can use your property to take a loan and then repay the loan amount in flexible EMIs.
What is a Loan against property?
A loan against property is a secured loan that allows borrowers to access funds immediately by giving their property as collateral. Both residential and commercial properties are considered collateral.
Lenders offer a loan amount based on the value of the property. For instance, if your property is worth Rs. 50,00,000/-, you will likely receive up to Rs. 40,00,000 as a loan depending on your age, income, credit score, repayment capacity, current financial obligation, etc.
Compared to unsecured loans, you can avail of a higher loan amount, lower interest rates, and flexible loan tenure. However, you must assess your needs and evaluate your affordability by using an online property loan calculator before submitting your loan application.
Things To Keep In Mind While Opting For a Loan Against Property
Several factors make a crucial impact on a loan against property. Before applying for a loan, you must consider these factors to make an informed decision
- Interest rate
The interest rate that you can receive on your loan against property depends on various factors such as the loan amount, income, loan tenure, credit history, and your relationship with your lender.
If you want to take a higher loan amount, you must ensure that you get the best interest rate available. First of all, find a lender that offers the most affordable interest rate and ensure that you have a stable income and a higher credit score.
Having a stable source income and a higher credit score enables you to not only get your loan application approved but you will also be able to reduce your interest rate significantly.
- Loan tenure
Lenders offer a repayment tenure of up to 15 years, allowing them to repay the loan amount without any financial burden. Although opting for a longer loan tenure can reduce your EMIs, it is worth noting that a longer loan tenure can substantially increase the overall cost.
Since the interest rate is calculated in a compounding manner, you will have to pay more in interest in the long run if you choose a longer loan tenure.
If you have the budget or have received a salary increment, it would be wise to opt for a shorter loan tenure to avail of a lower interest rate. This way, you can save a significant amount in interest.
- Additional fees
Besides the processing fee charged by lenders, there are several other charges involved, such as service charges, prepayment charges, statutory charges, and stamp duty fees. It is imperative to include all these charges while evaluating the total cost of your loan against property.
These charges may not seem crucial in the beginning, but they form a significant part of the total cost of the loan, and they may even affect your ability to repay the loan.
- Loan amount
The loan that you are eligible to get depends on the market value of your commercial or residential property. Depending on your lender, you may be able to secure up to 80% of your property value as a loan.
Keep in mind that a higher loan amount translates into longer loan tenure, which may reduce your EMIs, but you will have to incur higher overall interest.
You can use an online property loan calculator to assess your requirements and understand how much you can afford to take as a loan. Opt for a loan amount that you can repay within the stipulated EMIs without delays or defaults.
Keep in mind that your lender has legal rights to sell your property to recover the loan amount if you fail to make repayments.
- Tax benefits
Unlike a home loan or an education loan, you are not eligible to avail of tax deductions under the Income Tax Act 1961 by applying for a loan against property. You will need to pay taxes on the amount that you are using to repay the loan amount.
It is common to see borrowers opt for home loans or education loans for availing of tax benefits. So, you must be aware that you will not get tax benefits on a loan against the property before applying for one.