Are you in need of a large sum of money to meet your immediate financial needs? A loan against property might be the perfect option for you. It not just comes with a lower interest rate but also with a flexibility of usage and tenor. You can use this multipurpose loan to bear your medical expenses, fund your children’s education or expand your business.
The past few years have seen steady growth in the number of people opting for a LAP loan. If you, too, have decided to jump into the bandwagon, here are a few things you should consider before signing the loan document.
Rate of Interest
You will be charged an interest rate depending upon several factors, including the loan amount, tenure, income, and credit history. Loan Against Property interest rates typically lies between 9% to 14% though they vary from institution to institution. So spend your time doing some research before you commit to a particular lender.
Also, compare the rates will other credit instruments such as a personal loan or a home loan to see which one is most affordable. Even minor differences in interest rates can cost you a lot in the long run.
The Loan Amount
The loan amount will be determined on a careful assessment of the value of your property. Depending upon the lender, you may be sanctioned an amount between 40 to 80 percent of the value of your property. However, only borrow the amount that you can conveniently repay without defaulting. Experts advise you to keep your monthly EMIs within 60-65% of your total income. You do not want the higher EMIs to hurt other financial goals such as your retirement plan or children’s education.
The Loan Tenure
Most lending institutions will offer you a flexible tenure from 5 to 20 years for your LAP loan. While longer tenure might seem attractive at first due to smaller EMIs, they also increase your cost of borrowing. This is because your loan against property interest rates gets compounded in the long run, and you end up paying more. So opt for a shorter tenure as far as possible to save your total interest outgo.
Processing and Other Charges
Many borrowers often forget to factor in the processing and other charges into their cost of borrowing. These include the service charges, prepayment charges, statutory charges, and the stamp duty required to acquire the loan. Look out for these clauses in the loan document and estimate these costs beforehand.
No Tax Benefits
LAP loan does not offer you any tax benefits. You will have to pay tax on the amount you use to repay your loan. However, there are certain exceptional circumstances where you can claim the benefits. For example, if you use the fund to finance your new home, you can claim benefits up to 2 lacs under section 24(B) of the Income Tax Act.
Similarly, you can claim a deduction of the processing fees and the interest charges if the funds are used for your business.
Now that you’re aware of the different facets of a LAP loan, you can make an informed decision aligned with your financial goals. Taking a loan is a huge decision, so always make sure to do your homework first.