Loan against property: Five mistakes to avoid

Opt for shorter repayment tenure only if you are sure of repaying your EMIs by the due date without compromising on your contributions for your crucial financial goals.

By Ratan Chaudhary

Loan against property (LAP) allows property owners to leverage it for raising funds for business/personal needs without losing out on property ownership. Owing to the secured nature of the loan, lenders charge lower interest rates than unsecured loan options and take a more relaxed approach towards credit score when evaluating the borrower’s creditworthiness. However, the ease of approval makes most borrowers ignore a few important facets. Here are five mistakes that borrowers make before or during the LAP application process.

Not comparing interest rates
Interest rate of LAP can range between 7.95% and 13.10% per annum based on credit risk assessment of the borrowers. The interest rates may also differ depending on the loan amount and repayment tenure opted by the borrowers. Those planning to avail LAP should compare offers from as many lenders as possible. They should begin their loan hunt by approaching the financial institutions with whom they already have existing consumer relationships. Final LAP application should be made with the lender that charges lowest interest rate for the optimal repayment tenure and loan amount.

Not factoring in processing fees
The processing fees charged by most lenders is 1%-2% of the loan amount. As LAPs are usually big-ticket loans, processing charges may be significant. Thus, loan applicants should factor in processing fees charged by different lenders before submitting the final LAP application.
As per the RBI guidelines, LAP availed on floating interest rates do not attract any prepayment fees. However, lenders who offer LAP on fixed interest rates may levy prepayment/foreclosure charges. As prepaying fixed rate LAP may cost you a sizable amount, consider choosing floating interest rate LAP over fixed interest rate.

Not choosing right loan tenure
The tenure of any loan plays a crucial role in determining its EMI and overall interest cost. Longer repayment tenure can result in lower EMI out, but lead to higher interest cost. The opposite stands true for loans with shorter tenure. As the tenure of LAPs can go up to 15-20 years depending on the lender, select your LAP tenure primarily on the basis of your repayment capacity. Opt for shorter repayment tenure only if you are sure of repaying your EMIs by the due date without compromising on your contributions for your crucial financial goals.
Those who cannot should stick to longer repayment tenure for lower EMIs as failing to make timely EMI repayments can attract steep penal charges, adversely impact credit score and future loan eligibility. Borrowers opting for longer tenures can reduce their overall interest by prepaying from their surplus funds in future.

Not factoring in disbursal time
Disbursal of LAPs takes two to three weeks as lenders have to verify all the property linked documents and undertake a technical study to evaluate the market value of the property before approving the application. Thus, LAP may not be a suitable choice for those having a quick fund requirement. Such applicants should consider going for a personal loan or other loan options which have a comparatively shorter processing time.

Not factoring in LAP EMI in emergency fund
Financial emergencies such as illness, job loss, etc., can hit anytime, hampering your cash flow, income, and even the loan repayment capacity. To mitigate the financial risk arising from such unforeseen exigencies, borrowers should also factor in existing EMIs in their emergency fund corpus. Ideally, an emergency fund should be big enough to cover unavoidable expenses for at least six months.
Hence, as soon as you start planning for LAP, simultaneously enhance the size of your emergency fund by at least six times of the expected EMI of your LAP. As financial exigencies come unannounced, make sure to park your fund in liquid instruments like high-yield savings accounts and bank fixed deposits.

The writer is head, Home Loans, Paisabazaar.com

a secured loan
Interest rate of LAP is usually 7.95%–13.10% per annum based on credit risk assessment of the borrowers
As LAPs are usually big-ticket loans, processing charges may be significant
LAP availed on floating interest rates do not attract any prepayment fees
Select your LAP tenure primarily on the basis of your repayment capacity