What Are the Benefits & Drawbacks of Loan Against Property?


When you require funds to mitigate immediate requirements, the initial thing that you may tend to think about is a loan. However, a few people think it tough to decide which credit option to apply for or whether the loan against property option is an excellent deal. While some concerns might be justified, experts say that a credit option like a loan against property is one of the secured credit options, which has a lower rate of interest than other credit options. This permits you to use the value locked, which is locked up in property or land assets while continuing to occupy property in the course of the loan tenure. Also, note that a loan against property without income proof is possible as it is a secured credit option.

Benefits – 

Opting for a loan against property permits you to use the funds for distinct personal and business purposes, like setting up important ventures or expanding the same to mitigate sudden healthcare expenditures. This loan is even relatively available as lenders get an assurance for the money they lend. It is in great demand as individuals are allowed to borrow a massive sum, get flexibility over repayments and the rate of interest is lower than other loans. The loan tenure can be lengthy, which may result in lower loan EMIs. You can avail the tax benefits on interest constituent for loan against property option and usually, lenders do not charge penalties on early loan amount payments.

So, as suggested by the name, LAP or loan against property option is the loan proceeds that you can get by keeping your land or property in the form of a mortgage with the financial institution. The loan is offered as a specific percentage of the property’s market value. Usually, banks lend an amount of up to 50-60 per cent of the property value. As your land or property is kept in the form of collateral or security with the financial institution, it is an option secured in nature. In the case you fail at making the loan repayment, the lender holds the complete right to auction your land or property and recover the proceeds.

For what can you avail the loan against property option?

The loan option can be utilised for any purpose, besides speculative. You can use the proceeds for the following purposes –

  • Finance your child’s higher education
  • For financing any healthcare exigency
  • For your child’s wedding
  • Financing a dream trip
  • Expansion of business

What is the distinct loan against property benefits you must be well-versed with?

  • Lower rate of interest 

As a loan is availed keeping the property or land as security or collateral in mind, the interest rate is usually lower than a personal loan. The rate for a loan against property usually ranges between 8 per cent and 15 per cent per annum while the personal loan rate may range anywhere from 10 per cent and 24 per cent per annum.  

  • Lower to zero prepayment fees 

You may close LAP by making loan prepayments. Usually, lenders do not levy any prepayment fees in the case of LAP.

  • Simple to avail 

As they are a secured credit option, financial institutions are more than willing to offer such loans. Thus, you will not find it tough in availing a property loan.

  • Higher repayment tenure 

These loans are usually available for higher repayment tenure of up to 15-20 years while repayment tenure in the scenario of personal loan usually is as high as 7 years.

  • Lower loan EMI 

There’s an inverse relation between EMI and repayment tenure. The higher the repayment tenure, the lower would be the loan EMI and vice versa. As they are available for a higher repayment tenure, these options are suitable for individuals who cannot afford to pay a higher EMI. However, it’s always recommended that an individual must avail the loan for the shortest repayment tenure as the interest burden would be lower in the scenario of a short repayment tenure credit option.

What type of property can you mortgage?

You can mortgage any self-occupied home as rented residential land or it can be a land piece that you own. But it is important for your property to be free from any type of mortgage litigation. Basically, the property’s title must be clear.

How does the lender determine the loan proceed?

The lender takes into consideration various parameters such as age, income, and spouse’s income value of property in consideration to determine your loan. The lender usually offers loans of as high as 60 per cent of the property’s value.

Drawbacks – 

The period of waiting to secure the loan proceeds is very long and at times can be frustrating as lenders conduct a background check on applicants to make sure the candidate is legitimate. Financial institutions even check the applicants based on their credit profile, score, repayment potentials and various other crucial parameters, which are time-consuming. The next issue can be property valuation to be pledged in the form of security or collateral. Distinct financial institutions value properties depending on distinct parameters, there’s zero set pattern or standard.

The major risk, however, is a lender has sole authority over the pledged property in the occasion of the borrower failing to make the loan repayment on time. Lenders can restructure the loan or even sell it for recovering their money.

Frequently asked questions on loan against property benefits – 

How do you make repayment of loan against property option?

Make repayment frequently on your credit option. In this case, you can repay the loan proceeds within ten years. Use the online loan against property EMI calculator to choose the tenure so that your loan EMIs are affordable.

How much loan proceeds can you take up on a loan against property?

The highest loan amount that you can procure on LAP is Rs 5 crore.

How much home loan can you avail on property value?

The ratio of LTV for home loans can be as high as 90 per cent of the value of a property for Rs 30 lakh or less. This is as per the RBI’s set guidelines.