loan against property

When I have a home loan from one bank can I avail of a loan against property?

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 a 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.

An ideal solution in times of need

Most people shy away from loan against property 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 loan against property (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 loans that are popular in the sphere of loan against property.

Eligibility factors of Loan Against Property

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.

Impediments in eligibility

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 loan against property (LAP). In such cases, you are better off looking for a loan for a low CIBIL score.

Advantages of taking a Loan Against Property (LAP)

The greatest advantage of taking a loan against property (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.

How you can enhance your eligibility

In case you need some funds urgently, and are falling short of eligibility for loan against property (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 loan against property (LAP), you may consider liquidating some assets to clear the full outstanding on a loan that is close to full repayment.

Risk factors cannot be ignored

The advantage of a loan against property (LAP) is that it is an opportunity to monetize 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 Rs. 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 loan against property (LAP), you could stand to lose your property. Further, unlike home loans, there are no tax advantages on loan against property (LAP).

Make a prudent decision

Therefore, before you opt for a loan against property (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 loan against property (LAP). Else, you are better off taking an unsecured loan or a loan for a low CIBIL score, if your credit score is not satisfactory.

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