Choose loan-against-property for higher amount, low rates, flexible end-use

Avoid taking out such a loan if you have irregular income, are retired, or approaching retirement

With unsecured lending under pressure, banks and non-banking financial companies (NBFCs) are shifting their focus to loans against property (LAP), according to a recent report in Business Standard. Borrowers must understand the pros and cons of these loans before opting for them.

Eligible properties

Lenders accept self-owned residential, commercial, and industrial properties as collateral. “Only property that has a clear title, is free from legal disputes, and meets lenders’ valuation and documentation requirements, is eligible,” says Abhishek Kumar, Securities and Exchange Board of India (Sebi)-registered investment adviser and founder, SahajMoney.com.

 

Leasehold properties may also qualify if documentation is in order and the lease period is long. “Agricultural land is generally not accepted for LAP, unless the loan is specifically for agricultural purposes and the borrower is a farmer,” says Kumar.

 

Jointly owned and ancestral properties can be pledged. “All co-owners or legal heirs must provide written consent and become co-applicants,” says Kumar.

Large loan amount, long tenure

LAP allows borrowers to access large sums. Loan amounts can range from Rs 20 lakh to Rs 5 crore or more.

Being a secured product, LAP carries lower interest rates than unsecured loans (like personal loans) and business loans. Interest rates begin from slightly above 9 per cent.

 

“In contrast, personal loan rates range from 15 to 24 per cent, and business loan rates range from 16 to 26 per cent, depending on the borrower’s creditworthiness,” says Rishi Anand, managing director and chief executive officer, Aadhar Housing Finance.

 

The loan tenure is also longer. “It can go up to 15 years,” says Adhil Shetty, CEO, BankBazaar.com. The tenure varies, depending on the lender’s policies, the borrower’s income, age, and property type.

 

The loan-to-value ratio (LTV) depends on the nature of the property. “In the case of a residential property, the LTV can range from 60 to 70 per cent, whereas in the case of a commercial property, it is between 45 and 55 per cent,” says Anand.

Flexible usage

LAP offers significant flexibility. “Businesspersons can use it to purchase new equipment, stock higher inventory during the festive season, or set up new units,” says Anand.

 

LAP has also become the preferred choice for debt consolidation. “It is useful for consolidating multiple high-interest loans (like credit cards or personal loans) into one manageable EMI with lower interest outgo, thereby improving the borrower’s cash flow,” says Shetty.

 

Borrowers also use it to pay for their children’s higher education abroad and to cover medical costs.

Beware default risk

The borrower’s property is on the line. “Defaulting on repayment could lead to losing your property,” says Shetty.

Repossession begins if dues remain unpaid for over 90 days. “Borrowers are given adequate time and opportunity to correct the default,” says Anand.

 

Kumar highlights other drawbacks of this loan, like the lack of tax benefits and the strain of regular EMIs, especially for those with unstable income.

Compare lenders

While interest rate should be the key criterion for choosing a lender, other factors also merit consideration. The LTV offered should match the borrower’s requirements.

 

Some banks offer faster disbursal (two-four weeks) and smoother documentation processes, especially for salaried borrowers. The property verification timeline should be factored in as well.

 

Compare the loan features of various lenders before arriving at a decision. “Not comparing loan features across lenders may lead to a borrower incurring higher borrowing cost or availing a lower loan amount,” says Ratan Chaudhary, head of home loans, Paisabazaar.

 

He suggests beginning with banks and housing finance companies (HFCs) with which the borrower already has a relationship, and then using an online marketplace to compare other offers.

Is LAP right for you?

Missing EMIs on LAP can be costlier than defaulting on personal loans, as property is at risk. “LAP is suited for borrowers with a steady income, sound repayment discipline, and a clear repayment plan,” says Shetty.

 

Those with irregular cash flows may struggle to make regular EMI payments for a sustained period. “LAP is also not an ideal product for retired individuals without strong cash flows, or even those nearing retirement. Taking a 10–15-year loan in the late 50s can be risky, especially if your post-retirement income is uncertain,” says Shetty.

 

Kumar advises against LAP for those with high existing debt or for whom losing the property would spell severe hardship.

Dos and don’ts

Borrowers should decide the tenure after proper consideration. “Opting for a longer tenure than required adds to interest cost. A shorter tenure, on the other hand, may strain finances,” says Chaudhary.

 

He recommends selecting a shorter tenure only if one is certain of being able to pay the higher EMIs, without sacrificing contributions to other unavoidable goals. Failure to pay EMIs on time also invites penal charges and damages the borrower’s credit score.

 

Experts advise not pledging a jointly-owned property for this loan. “To avoid potential disputes or other repayment-related issues later, individuals should use a jointly owned property for LAP as the last option — only if they do not have any other property to pledge,” says Chaudhary.