Loan against property (LAP) refers to secured loans in which people keep their properties as collateral security and avail the money for different purposes such as business expansions, education, medical emergencies, or other financial requirements. But misconceptions about this loan are so widely prevalent, which does not allow the people to take the benefit of it.
These beliefs motivate some financial decisions, primarily based on fear rather than facts. In this blog, we will debunk eight common myths surrounding a Loan Against Property and present the reality behind them.
Myth 1: Loan Against Property Can Only Be Used for Business Purposes
Fact – While many business owners do avail of loans against Property from business expansion to investments, however, LAP is not only restricted to business expenses; lenders generally allow borrowers to use the loan amount for various other purposes such as higher education, wedding expenses, medical emergencies, home renovation, and debt consolidation as well.
A Loan Against Property provides a high loan amount, also depending upon the location of the property and its market value , thus a versatile tool for raising money to meet immediate personal and business needs.
Myth 2: Only Salaried Individuals Can Apply for a Loan Against Property
Fact: Both salaried and self-employed individuals are eligible for a Loan Against Property.This loan is available to a wide variety of applicants, including business owners or self-employed professionals and companies. The eligibility criteria primarily depends on income stability, and market value of the property rather than employment type.
Even if you are self-employed with fluctuating income, you can still apply for a loan against property, provided you meet the lender’s documentation and repayment criteria.
Myth 3: The Loan Amount is Equal to the Full Value of the Property
Fact: Lenders do not sanction a Loan Against Property for the full market value of your asset. The loan-to-value (LTV) ratio generally ranges between 75%-90% of the current market price of the property, though the exact figure depends on the lender’s policies and resale value of the property.
There are also other factors, which are assessed by lenders to come up with a reasonable loan amount in such a way that both borrower and lender mitigate the risks.
Myth 4: You Lose The Ownership of Your Property After Availing the Loan
Fact: The ownership of the property is not lost in the case of Loan Against Property. The lender will hold the property as security until the borrower has repaid the loan amount. The borrower remains the legal owner and may also use the property during the loan tenure.
The only risk of losing the property arises if there is a loan default, and even then, lenders offer multiple opportunities for repayment before initiating the process of foreclosure.
Myth 5: Loan Against Property Has a Higher Interest Rate as Compared to Other Loans
Fact: A Loan Against Property actually has one of the lowest interest rates among secured loans. Since LAP is secured by collateral, lending institutions often view it as a safer option with low risk, allowing them to charge competitive interest rates usually ranging between 8% to 15% per annum depending on the lender and credit rating of the applicant. Conversely, unsecured loans such as personal or business loans are charged higher rates of interest of anywhere between 12% and 24% with no collateral to secure the loan.
Myth 6: The Loan Approval Process is Lengthy and Complicated
Fact – Many borrowers think that getting a Loan Against Property is a cumbersome process, but this is far from the case. In reality, lenders have simplified this entire procedure. With the advent of digital banking and online application processes, approvals are faster than ever.
If you already have all the necessary documents ready, such as property papers, income proofs, and identity verification, many banks and NBFCs can sanction the loan in 48 to 72 hours. Some of these NBFCs even offer instant approval and doorstep services to make the process hassle-free.
Myth 7: You Need a High Credit Score to Get a Loan Against Property
Fact: A high credit may help you get better interest rates and terms, but LAP is a secured loan in which lenders have some flexibility on credit score requirements as compared to unsecured loans.
If your credit score is low, then the lenders may approve the application based on the market value of the property, income stability, and repayment capacity. However, if you have a strong credit history, there are better chances for you to get favorable terms for your loan against property.
Myth 8: Prepayment of Loan Against Property Comes with Heavy Charges
Fact: Many borrowers fear prepayment charges, assuming they will have to pay hefty penalties if they want to close their loan early. However, this depends on the type of interest rate you choose.
- If you avail a fixed interest rate, some lenders may impose a nominal prepayment penalty.
- With a floating interest rate, RBI norms do not allow lenders to impose any prepayment penalties on individual borrowers.
It is always advisable to check your lender’s prepayment terms before finalizing the loan to avoid any surprises in the future.
Final Thoughts
You simply need to understand the process, eliminate misconceptions, and choose the proper lender.
Even first-time borrowers can get a loan against property if they meet the lender’s criteria. A high credit score is not always mandatory for a loan against property, and technological advancements have made approval processes more efficient and faster.
If you’re planning to apply for a loan against property or a home loan, compare offers, check eligibility, and make a well-informed decision. For more details on loans against property, contact us and we will provide you personalized guidance and support throughout the Loan against property process.
