There’s no denying that personal loans are preferred for people looking for quick money. People apply for personal loans to tackle medical emergencies and sudden financial requirements.
However, a loan against property, a.k.a. property loan, also provides similar benefits to personal loans at much lower interest rates. A quick scan of the top personal loans reveals that the interest rates are always lower and terms more flexible too.
What is a Loan Against Property?
A loan against property is one of the simplest loans in India.
The primary eligibility for it is that the borrower must own residential or commercial property. Lenders evaluate the value and status of the property to calculate the loan amount and interest rate of a loan against the property. The repayment term of these loans can be up to fifteen (15 years) from the date of loan disbursal.
However, since property loans are secured (backed by a property), it is wise to exercise caution. The following section discusses the top tips to extract the most from a loan against property without risking your asset.
Tips to Use a Property Loan Like a Pro for Larger Funding
Use a Loan Calculator to Compare the Interest Rates
The Loan against property interest rate plays a vital role in determining the loan cost. If the interest rate is high, you have to shell more and vice versa.
The best way to get decent rates is by using a property loan calculator to compare the rates offered by different lenders.
A property loan calculator needs three figures – principal, rate of interest, and tenure – to fetch information about the EMI. And you can change the input figures as many times as you want to arrive at a suitable EMI figure.
Understand the Risks
While it is true that property loans are one of the easiest and cheapest loans to get, there are some risks involved if you do not deal with such loans carefully.
Loan defaults are dealt with severely by lenders. Usually, lenders send notices to people not paying the EMIs for three consecutive months. If the borrower does not respond, they may liquidate the borrower’s property. Also, non-payment of loan dues affects the borrower’s credit score negatively.
Hence, before applying for a property loan, you must analyze your repayment capability and pick an amount you can repay conveniently.
Choose the Interest Type Wisely
Interest rates can be of two types – fixed and floating. Lenders choose a fixed-rate loan when the interest rates are in an uptrend.
Since a fixed-rate loan remains the same throughout the loan term, you can remain certain about the EMI and term.
However, if the interest rates are in a downtrend, it is wise to opt for a floating-rate loan since you can save a considerable amount when the interest rates decline.
Know the LTV and DTI Ratio
LTV refers to the Loan To Value lenders approve on property loans. The LTV is generally 70% of the property’s market value. So, if your property’s actual market value is INR 1 crore, you can get a loan worth INR 70 lakh.
However, the actual loan amount depends on your eligibility, including property status, value, and monthly disposable income.
Indian lenders prefer keeping the EMI at less than 50% of the borrower’s monthly income. This is known as the DTI ratio or Debt-to-Income ratio. If your DTI ratio is higher than 50%, the lender may reject your loan application.
So, before applying for a property loan, properly evaluate the LTV and DTI ratios.
Eligibility Matters
Property loan eligibility is simple – your income must be above the threshold prescribed by the lender, and your property must be freehold or free from legal disputes.
Also, lenders often check the borrower’s credit score to analyze the borrower’s financial profile.
A sensible borrower repaying all loan EMIs on time will have a high credit score. In contrast, if someone frequently misses the payment deadlines, their credit score would reflect them, and lenders may increase the rates to minimize their risks.
Conclusion
A property loan is undeniably one of the simplest loans you can avail of to tackle financial emergencies or fulfill important life goals. But, it is wise to make an informed decision by keeping in mind the points mentioned above.
