How to leverage your property to raise a loan at low rates

#banking, loan

Lenders usually do not place any restrictions on the end usage of a loan against property (LAP), except for speculative purposes. This allows you to leverage your property and raise bigger loan amounts for personal or business needs. If you wish to apply for a loan against property, here are some factors you must take into consideration.

No restriction on end-usage of funds:

Interest rate: The interest rate of LAP can vary – usually between 6.90 percent and 13.85 percent a year – depending on the lender and the risk assessment of the applicant’s credit profile. Some lenders offer relatively lower interest rate for self-occupied residential property vis-à-vis commercial property or the ones that are not self-occupied. The interest rate could also vary depending on the required loan amount and the repayment tenure opted for by the borrower.

Repayment tenure:  Most lenders offer LAP for a tenure of up to 15-20 years – relatively longer than the ones offered by other credit facilities having no restriction on end-usage of funds such as gold, personal and top-up home loans.  The tenure of a top-up home loan is usually up to the residual tenure of the underlying home loan, subject to the maximum limit of up to 15 years. The tenure of personal loan is also on the shorter side, ranging from 1-5 years for most lenders.

Remember that a shorter tenure implies higher EMI pay-out but lower interest cost, whereas longer repayment tenures result in smaller EMIs but higher interest cost. So, don’t forget to factor in your repayment capacity as well as monthly investments earmarked for crucial financial goals while deciding the loan tenure. You can try to reduce the overall interest cost by prepaying the loan whenever you have surplus funds.

Loan amount: Lenders usually provide 50 percent-70 percent of the property’s market value as loan depending on the applicant’s repayment capacity, income, etc. Additionally, other parameters including the location and age of the property, surrounding infrastructure, etc are also factored in while evaluating the market value of the property and while sanctioning the loan amount.

Processing time: Lenders verify all your property-related documents before disbursing the loan. They also undertake a technical study to confirm the ownership of your property and its market value. Thus, the disbursal of LAP may take around 2-3 weeks. You must take this into consideration before applying for LAP as it may not be suitable for those looking for quick loan disbursals.

Processing fee: The processing fee for LAP is around 1 percent-2 percent of the loan amount for most lenders. As LAPs generally involve bigger loan amounts, their processing fee can constitute a sizable sum in the overall cost of the loan. So, compare the processing charges levied by various lenders, as even a slight variation in this fee can make a significant difference in the total cost of the loan.

Prepayment charges: As per RBI guidelines, lenders are barred from levying prepayment penalty on LAP disbursed on floating interest rate. However, lenders may levy prepayment charges on LAPs lent on fixed interest rate. Hence, prepaying a fixed rate LAP can cost you a considerable amount on account of prepayments charges. Instead, take LAP on floating rate over fixed ones. This will allow you to prepay the loan whenever you have surplus funds without incurring any penalties.

Final Words

First check the options available with your existing banks and housing finance companies. Then, visit a few online financial marketplaces to compare other loan offers on the basis of your monthly income, credit score, job profile and other loan eligibility criteria.

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