While there are various types of loans available in the market to fulfill the financial requirements of a person, a loan against property has emerged as one of the popular choices as it is a pocket-friendly and multi-purpose loan offered by lenders at a reasonable rate of interest.
While both residential and commercial properties can be used as collateral to obtain funds from a financial institution, one must know about the various associated factors such as understanding the property value, multiple charges, and tax benefits in advance to get the best deal. Read on to know about the five things to know before applying for a loan against a property.
Things To Know Before Applying For Loan Against Property
- Acquire the best interest rate
A key thing to note is that the loan against property interest rate varies from one lender to another. Hence, one should do an in-depth investigation and compare the property loan interest rates offered by different financial institutions to get the best offer for your asset. Since the levied interest rate offered on a property loan depends upon various factors such as the candidate’s monthly income and credit score, total loan amount, repayment period, etc., one can be pretty hopeful of getting the cheapest interest rate upon negotiation with the lender. While the difference in interest rates may seem nominal at first, it could reduce your overall loan amount by a considerable margin.
- Know the property value and loan amount
In case of opting for a loan against a property, it can be pretty challenging to decide on a loan amount if you do not know the value of your property. Hence, one should be aware of the importance of a residential plot or commercial shop before proceeding to the lender for a loan. It could give you an upper hand in obtaining a higher loan amount against your precious asset. While the value of a property is generally decided based on its age, location, size, and amenities offered, you should perform a proper evaluation by a real estate dealer. It would help you get between 40% and 80% of your property’s market value as a loan amount.
- Obtain the finest repayment tenure
Another critical aspect to focus upon while applying for a loan against property is the repayment tenure offered by the lender to pay off the loan in equated monthly installments (EMIs). While the loan tenure for a property loan can be as long as 15 years, you may not want to opt for it as it will cost you a hefty sum of money as interest over time. It is due to the simple fact that a longer tenure may cost you smaller EMIs and increase the overall cost of borrowing as the interest is calculated in a compounded way for any loan. Hence, it would help if you were pretty careful in deciding the final repayment tenure to afford EMIs without giving away extra money in vain.
- Analyze the processing and additional charges
Along with the loan tenure, loan against property interest rate, and loan amount, another major factor to look out for in a property loan is the processing and other hidden charges levied by the lender to extract additional money from your account without letting you know. While the processing fee is usually charged up to 3% of the loan amount, some lenders may impose foreclosure charges and service tax on the loan, increasing the overall cost of a loan. Additionally, you should also know that the borrower also needs to pay statutory charge and the stamp duty charge as per state law while availing of a property loan. Hence, make sure to compute the total cost of a loan by incorporating all the related expenses to avoid any confusion at a later stage.
- Assess the tax benefits
While there are certain tax benefits provided to the borrower in home loans and education loans, there are no such tax benefits given in a loan against property. Hence, one should compute the EMIs before taking a loan and be sure that the amount used to repay the loan will be considered their taxable income, and they will have to pay tax on the same as per the government guidelines.