Potential Gains and Pitfalls Of A Loan Against Property

  • Added:
    Mar 30, 2014
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Potential Gains and Pitfalls Of A Loan Against Property Photo by Aishwarya Mahurkar

Opting for a loan is a major financial commitment, which users should not take lightly. At the end of the day, you should make a careful decision as it is bound to affect your financial life heavily. A loan against property is a very volatile subject. It is thus important to understand it holistically before diving in.


Gains


Financial institutions allow you to take a loan against your current residence for which you are paying home loan EMIs. This basically means that the loan amount doesn’t even depend on your current repayment capacity due to collateral. Other gains are also available such as:


• Lower interest rates as compared to personal loans: The purpose of opting for a loan against property  or a personal loan is mostly the same in India. You can choose either of the loans for any personal requirement. However, personal loans cost much higher due to high interest rates. Personal loans charge interest rates within the range of 14% to 20% whereas these secure loans charge 10% to 14.75% interest.


• Larger sum as a loan amount: Most personal loans depend upon your current earnings, liabilities and credit score to identify your repayment capability. These factors will determine the principal amount that will be approved. However, banks and finance companies approve up to 80% of the cost of the property when you take a loan against property. 

 

• Longer loan tenure: Depending upon the amount of loan, lenders allow you to select a comfortable loan term, wherein you can repay your dues easily and comfortably.


Pitfalls

 


• Failure to return the loan: If you fail to pay back the loan, you will lose the property that had a much higher value than the amount you owed. It can be extremely problematic if you fail to pay the loan in later years, when you have already paid a substantial amount of the principal and have lost your current residence due to the interest amount.


• Expensive loan processing: Since lenders need to evaluate the market cost of the property, loan processing is expensive and can delay the loan approval considerably.


• Loan to Value ratio: If you take only a minimum amount as loan against your property, it is too big a risk since you may end up losing your collateral due to any medical or financial challenges, for a much smaller amount.


As you go through the advantages and drawbacks of the loan against property , you will realize that this option is a much easier one to pick, as long as you can repay the same. Therefore, if you can wait for the loan proceedings, which are much slower than personal loans, it is totally worth it for important expenses such as pre-planned medical expenses, education loans for children, wedding expenses etc.  So, choose well.

Author's Profile

Aishwarya Mahurkar is an experienced writer concerning the finance industry. Her articles help in informing her readers of the different types of home loan products such as Housing loan, Home improvement / renovation loan, opting for a loan against property, land / plot loan & processes that cover advantages and drawbacks of the loan against property


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