Loan against Property: Is The Risk Worth it?

If you have ever applied for a loan, then you know it’s harder than ever to get one approved. Whether we talk about personal loans, home loans, car loans, it’s the same with all.

A lot of thought goes into the loan assessment process, mainly because the stakes are usually quite high. Almost every lender checks for the following things- borrower’s monthly income, repayment history, current debt, history of loan defaults. However, there is one more thing that they especially pay their attention to. This thing is called CIBIL score.

Your CIBIL score tells the bank how high or low your creditworthiness is. So, if you will approach them with a low CIBIL score, then chances are that your application will be rejected. However, your odds increase with the score in the same way. That said, if you are having a hard time getting a loan, then you can always take it by offering your property as collateral. What is Loan Against Property (LAP)? The term “loan against property” is pretty self-explanatory. It’s a loan that you get against the mortgage of a house or some other property. The amount of LAP that you can get the most is usually about 40% to 60% of the property value which is calculated by the bank itself. A LAP can also be called a secured loan as you have to give a guarantee by offering your property as security. However, this also means that it’s easier to get because the bank has to deal with a smaller risk as compared to an unsecured loan.

Is LAP Risky? A LAP is easier to get, involves fewer formalities, and can also work for someone with a low CIBIL score. However, it has its risks too. To understand how to take a look at the differences between a personal loan and LAP: A LAP can only be obtained by mortgaging your property. A personal loan, however, doesn’t require collateral or even a guarantor. The interest rate on a LAP varies between 12% and 16%. However, for personal loans, it varies between 16% – 21%. In most cases, the maximum loan tenure you can get for LAP is 15 years or even more. However, personal loans usually have a shorter tenure, which can be as long as 5 years. LAP can be obtained rather easily as you offer the property as collateral which is enough to cover the loan amount.

Since a personal loan is unsecured, the bank is extra careful and takes many other factors into account as well, including your income, credit history, etc. Since LAP usually has a small interest rate, the EMIs are usually smaller than the personal loans. The only risk that matters with a LAP is the risk of default, which means when you are unable to repay the EMIs. When this happens, then the bank can seize your house/property. Naturally, it’s a big deal. However, additionally, your CIBIL report may also take a big hit, which in itself is a big problem too. So, these were the risks that come with LAP. However, there are some benefits too which you can consider seeing whether they are worth it or not.

The following are the main benefits of LAP:

  • Attractive interest rate
  • Easy approval
  • Smaller EMIs
  • Long tenure

Overall, if you are good at personal finance and monitor your credit report on a regular basis, then it may be easy for you to get and repay a LAP. On the other hand, if you are often late with your payments, tend to maintain a high credit utilization ratio, and most importantly- don’t want to take any risk with your property- then maybe you should look for other options. One of the most common reasons why people choose LAP is because they don’t have a high CIBIL score. If that’s the case with you too, then you can work on your score and bring improvement so that you can choose a personal loan instead which is less risky.

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