Loan Against Property is obtaining a loan against an immovable residential/commercial asset using it as collateral. Loan Against Property also called as Mortgage Loan, is sometimes considered as an alternative to Personal Loans. Even though personal loans are easy to avail, they have significantly higher interest rates. A person or an entity owning a residential/commercial immovable property primarily qualifies for applying a Loan Against Property.
Following are some of the pros and cons of taking a Loan Against Property.
Pros and Cons of taking a Loan against Property
Pros
Lower interest rates
When compared to a Personal Loan, the interest rates of a Loan Against Property are low, considering the collateral. The interest rate depends on the applicant’s credit score, the type of property being mortgaged and also loan amount in some cases. If the applicants have good credit score and repayment capability, they have a good chance of getting competitive interest rates. It is always advisable to compare the interest rates of different banks while availing the loan.
Size of the Loan
While availing a loan against property, the loan amount sanctioned depends on the value of the property being mortgaged. High valued properties can lead to sanctioning of higher loan amounts, subject to other criteria’s of the banks. Further, the size of the loan also impacts the EMI and the tenure of the loan.
Retaining the ownership of asset
The property that borrowers submit as collateral for the loan is usually a residential or commercial shop that is used for daily business. General belief is that mortgaging the property as collateral leads to giving up the ownership of property. But contrarily, the applicants still own the mortgaged assets and can continue using them until the time they promptly repay the loan.
Loan repayment tenure
The repayment tenure for Loan against property is longer and flexible than personal loans, usually leading to interest rates lower than personal loans. Karnataka Bank offers loan against property with tenure up to 120 months with attractive interest rates. The monthly repayment burden can be further reduced (lower EMI) if the applicant avails longer tenure.
Cons
Longer waiting period
The banks conduct in-depth background check of the applicant to make sure that the person applying for the loan is legitimate and examine the property thoroughly for valuation. This leads to higher waiting period to avail the Loan against property, when compared to other loans.
Loan amount based on property’s market value
The amount applicant receives as cash against property is decided by the banks, after they examine and estimate the market value of the property being mortgaged. Since the bank estimates the market value of the property, the sanctioned loan amount is usually lower than the actual value of the property and is usually between 75%-90% of the property’s estimated value, as per the policies of most banks.
Impacts of loan repayment failure
Any failure in the repayment commitment will not only attract penalty but also affect your credit score. In any case the applicant is unable to repay the loan, the banks also have the authority of taking further actions on the mortgaged property, as per their policies.
Processing Fees
Most banks charge processing fees depending on the loan amount. Such charges are collected upfront by the banks for obtaining legal opinion, valuation of property, documentation charges, etc. Some banks charge the customers up to 1% of the loan amount.