There are times in life when you find yourself in sudden need of finances. Be it a need of extra working capital that may have cropped up in your business, some unaccounted-for expenses for a wedding in the family or any other urgent financial need. At such times, all you can think of is where the finances will come from. The natural option to consider at such times is hassle free loan like a personal loan. However, if you are the owner of a property, you can consider a loan against property (LAP) instead.
Most people shy away from LAP because they think they are not eligible for one if they already have a home loan from another bank. If you too are wondering whether you can take a LAP, when you already have a home loan from another, the good news is that you can indeed opt for such a loan, so long as you meet the eligibility criteria. There are many products such as DHFL home loan that are popular in the sphere of LAP.
While the eligibility criteria may slightly differ from one bank to another, the common factors are income, CIBIL score and your current debt obligations against your total income (debt-to income ratio). Banks prefer a total debt to income ratio of 40% inclusive of all loans and credit obligations. If the lender deems your creditworthy, you can avail of a LAP that is pegged between 40% -60% of the current market value of your property. Such property can either be self-occupied or a residential property put on rent. You can even avail of LAP against a self-owned plot of land.
The interest rates on such loans is in the range of 12-15.75% and the tenure can be a maximum of 15 years, or before you reach the retirement age of 58. Therefore, if you are close to retirement and have only a few years left to go, your loan eligibility will be capped till the number of years you have left in service. Also, if your CIBIL score is less than the satisfactory level of 750 (out of 900), a traditional lender may not be forthcoming in giving you a LAP. In such cases, you are better off looking for a loan for low CIBIL score.
The greatest advantage of taking a LAP is that it is a secured loan, as it is being issued against a property that is your name. Therefore, the rate of interest on such a loan is lesser as compared to personal loans (available in the interest rate range of 14-19% depending upon eligibility). Yet just like personal loans, LAPs can be used for a variety of purposes such as meeting medical expenses, wedding expenses, expenses related to higher education of children and so forth.
In case you need some funds urgently, and are falling short of eligibility for LAP from DHFL home loan or any other loan product, you can show rental income from an existing property to enhance income eligibility. You can also co-apply with your spouse (if he or she is employed and has a steady income) to enhance your income eligibility. If your debt to income ratio is not adequate to meet the eligibility criteria of LAP, you may consider liquidating some assets to clear the full outstanding on a loan that is close to full repayment.
The advantage of a LAP is that it is an opportunity to monetise an idle asset in case of sudden need of funds and that it is secured in nature. Further you can get a higher amount in a LAP as compared to personal loans where you can avail of a maximum loan of ₨ 10 lakhs. While, there are definite advantages of taking a LAP against any other line of credit like a personal loan, do remember that there is an element of risk involved. In case you fail to make a repayment on a LAP, you could stand to lose your property. Further, unlike home loans, there are no tax advantaged on LAP.
Therefore, before you opt for a LAP, carefully consider your options and your repayment capabilities. Financial advisory wisdom states that people often tend to overleverage, or risk an asset for a relatively smaller amount of loan. Therefore, consider all the pros and cons of taking such a loan before you make an application for a LAP. Else, you are better off taking an unsecured loan or a loan for low CIBIL score, if your credit score is not satisfactory.