How Does a Loan Against Property (LAP) Help a Borrower?

Loan Against Property is preferred by borrowers in situations where they are in need of immediate money at a lower interest rate, and need a larger loan amount. This is mainly possible because LAP is a secured loan. This means it is given against a property that the lender keeps as mortgage as a collateral. Here property could be residential or commercial property. The other good thing about LAP is that the loan amount could be used for anything – be it marriage, travel, education expenses, or for medical emergencies, debt consolidation, home renovation or business investment.  

What are the unique benefits of this loan product that can help you as a borrower? We answer that in details below. 

Top Benefits of Loan Against Property 

Applying for a loan against property offers a range of benefits regardless of whether you run a business or are salaried. Here are a few. 

1. Higher Loan Amount

One of the unique advantages of securing loan against property (LAP) is that you can secure a higher loan amount. In contrast to other secured funding options like a gold loan, the amount is much higher. The reason for this is that the collateral involved in this loan is not only valuable but also keeps appreciating due to consistently growing demand. 

2. Multi-purpose Loan

A loan against property has versatile usage. You can use the funds for various reasons, such as business or personal needs. Considering the higher loan amount, people usually use it to fund their child’s education, pay for wedding expenses, or cover medical costs.

This loan is also ideal for kick-starting a business. Most lenders do not approve business loans to startups because of a lack of credit track record and experience. But if you have real estate property, you can easily mortgage it to secure funds and use it to set up a new office, hire staff, or launch a new product.

However, remember that since the collateral involved here is a valuable asset, you should have a backup repayment plan to avoid the scenario of default and auctioning off your property.

3. Competitive Interest Rate

LAP is preferred because it is a low interest rate loan. The interest rate on a loan against property is much lower than other forms of secured and unsecured financing. With various lenders, the LAP interest rate starts as low as 11%. As a business owner, the amount you save on the interest component can be channelled to meet your business requirements, such as raw material procurement, paying utility bills, or marketing your products or services.

4. Flexible Repayment Tenure

A loan against property is available for a maximum repayment term of 15 years. Since the repayment tenure directly influences your finances, lenders allow you to choose a tenure with an EMI that suits your affordability.

To understand how this flexibility helps you, let’s take an example.

Suppose you run a shoe store business and plan to open a new branch in your city. Your funding requirement is Rs 40 lakh, and your monthly revenue is Rs 1 lakh. Based on your business credibility and personal credit score, the lender agrees to sanction funds at 11%.

Here is how different tenures would affect your budget. 

Parameters	Repayment Tenure
	3 Years	6 Years	9 Years	12 Years	15 Years
Loan Amount	Rs 40,00,000	Rs 40,00,000	Rs 40,00,000	Rs 40,00,000	Rs 40,00,000
Interest Rate	11%	11%	11%	11%	11%
EMI	Rs 1,30,955	Rs 76,136	Rs 58,503	Rs 50,142	Rs 45,464
Interest Payable	Rs 7,14,375	Rs 14,81,815	Rs 23,18,372	Rs 32,20,478	Rs 41,83,498

Considering this table, it is ideal to choose a repayment period of nine years. The reason is that the interest payable is less than 12-15 year durations. On the other hand, The EMI is also less than the preceding two, making your debt-to-income ratio lower than 50 and improving the approval chance of future borrowings.

5. Tax Benefits

Unlike housing loans, the tax perks are not direct with a loan against property, and you need to meet the following conditions to avail of one:

• You can claim a tax deduction on interest payments of up to Rs 2 lakh under Section 24B. To qualify under this section, you must be a salaried employee, and the borrowed funds must be utilised for acquiring or constructing a residential property.
• If you are a business owner utilising the funds to meet business-related expenses, interest payments qualify for a tax deduction under Section 37(1). Ensure you record the interest payments and loan documentation, processing, and other associated charges under the expense section of your firm’s Profit & Loss Statement.

Wrapping up

With the affordable interest rate, extended repayment tenure, and higher loan amount, a loan against property is a preferred choice for most borrowers. However, before applying for this loan, you must remember certain things. Make sure the property you are mortgaging is free from any disputes. Also, check if your credit score, income, and work experience match the lender’s eligibility criteria. These few things can help make the loan approval process easier. Additionally, ensure that you have a solid repayment plan in place; otherwise, a situation of default might arise, and you may lose your property.

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