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Loan against property is a secured loan that allows you to leverage your property as collateral to borrow money against it. As its backed by an underlying property Being a secured loan option, The interest rates offered on these loans is usually lower than personal loan interest rates and tenure going up to 15-20 years, loan against property can be a good option for funding relatively large scale personal or business needs. But before you go ahead and avail loan against property, it would be prudent to stay clear of these myths.
Myth: The property pledged as collateral cannot be used by the borrower.
Pledging your property for availing loan against property does not prohibit or restrict you from using it. As a property owner, you have the full possession of the pledged property as long as you do not default on the loan. In As loan against property is a secured loan, lenders have legal right to auction the pledged property, in this case a property, to recover the outstanding dues.
Myth: You can get a loan amount of up to 100% of the property’s market value.
Banks and HFCs offering loan against property usually lend up to 75% of the property’s market value as a loan. However, the final loan amount offered will further depend on your credit profile and the features of the pledged property such as its age, location, surrounding infrastructure, geographical stability, etc.
Myth: You should have a high credit score to avail a loan against property.
This is not true. Even with a low credit score, it is possible for anyone to avail a loan against your property. The loan is secured by an underlying property, which your lender can sell to recover the uoutstanding loan. This considerably reduces the credit risk for lenders and also their dependency on using their applicants’ credit scores for evaluaing their creditworthiness during the loan process. This is also the reason why qualifying for a loan against property could be more easier for some individuals than qualifying for a personal loan.
Myth: Restriction on how the loan proceeds could be used
Most of us assume that loans against property come with restrictions on end- usage of funds. However, in reality, just like other borrowing options such as personal loan, top-up home loan and gold loan, loan against property does not restrict usage of loan proceeds, except for illegal or speculative purposes. Borrowers can put the loan proceeds towards various purposes such as business expansion, child’s higher education, working capital needs, etc.
Myth: Loan against property involves shorter tenure
Contrary to this myth, loan against property involves longer tenure which may go as high as 20 years. Other loan options such as personal loan, gold loan or top up home loan usually involve relatively shorter tenures of up to five years, three years and 15 years, respectively.
Myth: Only residential property can be pledged for availing a loan against property.
Most lenders accept residential property as well as commercial property to be mortgaged for borrowing loan against property. Some lenders also allow industrial property to be pledged for availing the loan.
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