Robust debt management is an integral part of servicing any credit, especially high-value secured ones like loan against property. It is one of the most sought-after borrowing solutions individuals usually avail to address big-ticket expenses. LAP allows borrowers to mortgage any of their immovable assets and raise funds for any planned or unplanned financial requirements.
Since it is an asset-backed loan, borrowers need to be careful about repayment to ensure sustenance of the mortgaged property’s ownership. It also helps curb the looming threat of bad loans, which grew almost to 3.96% by August 2020.
A property is considered as an asset that you can use during the emergency. When such property is used as the collateral, the loan is provided by a lender at a lower rate of interest. And that leads to the payment of lower EMIs helping you manage your expenses better. Nonetheless, to ensure timely repayment and facilitate a better borrowing experience, first, you need to know common mistakes that borrowers often commit before applying for this advance.
Mistakes to avoid before applying for a loan against property
Following are some basic mistakes borrowers should avoid before applying for this loan against property.
- Failing to assess exact credit requirements
It is crucial to decide the exact loan amount borrowers want to avail. Depending on the current market or resell value of an asset, a loan against property can be substantial. Moreover, lenders also sanction an LTV of up to 75% of the collateral’s current valuation. Therefore, it often entices borrowers to over apply for an amount more than they actually require. Over borrowing not only increases financial stress but also affects the credit score.
- Choosing the wrong tenor
A loan tenor plays a vital role in determining the overall borrowing cost and monthly instalments. While a longer tenor reduces EMI outgo, it increases total interest accrual and vice-versa. Moreover, a loan against property usually accompanies a tenor ranging up to 20 years, allowing borrowers to choose a term convenient to them. Hence, primarily, they should select a tenor based on repayment capacity. Borrowers can choose a shorter tenor if they can continue paying high-value EMIs without fail or hampering other financial liabilities.
Otherwise, lenders charge a penalty for every missed EMI, and it eventually brings down the credit score. Remember that lenders offer higher loan against property interest rates for shorter tenor, as the risk of default is high in such cases.
- Not comparing interest rates
Typically, the interest rates of a loan against property are reasonable as it is secured with collateral. However, this rate varies with different factors that borrowers need to consider while opting for a LAP. Since the interest rates decide EMI and total interest payable, individuals need to compare different lenders to avail the most competitive interest rates. Financiers offer an interest rate based on risk assessment, the creditworthiness of applicants, etc. Hence, it is vital to know about the factors that affect the interest rate for LAP.
Tip: Borrowers can use an online LAP EMI calculator to estimate monthly instalments and get a detailed amortisation schedule.
- Neglecting eligibility criteria
Meeting lender-specific eligibility is important to ensure guaranteed approval for a loan against property. As per a TransUnion CIBIL June report, the demand for loan against property reduced by -7.6% in November 2020, as compared to the previous year. It clearly testifies a lender’s risk appetite and the consequent reluctance of loan approval.
Hence, it is high time borrowers should check basic eligibility criteria before applying to avoid rejection. Following are some eligibility parameters –
- Credit score
- Age
- Property type
- Monthly income
- Employment type
It is vital to know how credit score affects loan against property eligibility. Fulfilling eligibility criteria is also essential to avail reasonable LAP interest rates.
- Overlooking additional charges
Depending on lenders, a loan against property accompanies processing fees of 1% to 2%. It means, if one avails a loan against property of Rs.50 lakh, he/she may have to pay processing fees of up Rs.1 lakh. Hence, it is necessary to know fees and charges for a loan against property in detail before applying for it.
As per RBI guidelines, lenders cannot charge prepayment fees on LAP with floating interest rates. However, lenders can levy prepayment and foreclosure charges on LAP with fixed interest rates.
- Not knowing loan processing time
Generally, lenders take weeks to approve and sanction a loan against property. However, select NBFCs disburse this credit within as less as 24 hours’ time. They also offer a substantial loan amount against reasonable mortgage loan interest rates.
Such lenders also often provide pre-approved offers that further simplify and expedite loan processing. These offers are available on various financial products like loans against property, home loans, etc. Check your pre-approved offer by mentioning your name and contact number.
Besides resolving these issues, individuals should also maintain an emergency fund so that they do not have to stop paying EMIs during sudden financial crunches. By avoiding making these mistakes, borrowers can avail a loan against property and leverage its benefits to the fullest.
Must Read : Documents Required for Filing Income Tax Returns in India
