Things to Remember Before Taking a LAP

Availing of a loan against property (LAP) to meet personal and business-related financial needs has become quite common. With a LAP, borrowers can raise a significant sum of money at a low interest rate by pledging their property to the lender. Salaried people, on the other hand, use this financing option to pay for their child's education, wedding expenses, and house renovation. LAP is a secured loan granted against commercial or residential property with a clear ownership title. If you are considering taking this loan, here are some factors to consider.
 
Things to remember before taking a LAP: 
 
  • High loan amount: 
Compared to other types of finance, a LAP provides a greater loan value. The fund value is determined by the property's current market worth. Financial institutions offer LAP for loan-to-value ratios ranging from 40% to 75%. The maximum loan amount in instant LAP is dependent upon several other factors such as your age, income, credit history, property type, and property papers as well. 
 
  • Low interest rates: 
The loan against property rate of interest is usually lower than other loan forms. This is because usually, the mortgaged property is of greater worth. To make it clearer, let us use the gold loan as an example. When you take a gold loan, the lender charges an interest rate of around 12% On the other hand, the interest rate on LAP will be 9.50%. Both loans are secured by assets—one by gold and the other by land or a building. However, because land or buildings have a far higher value than gold, the interest rate on the latter is lower. From the lender's aspect, LAP lowers the default risk.
 
Also Read: 6 Brilliant Ways of Taking LAP and Fully Utilising Your Property
 
  • Multipurpose loan: 
The funds from loans against property can be used for various purposes. The lending institution does not ask you to mention the reason for availing of a LAP. The funds can be used to meet wedding expenses, for home renovation, medical emergencies, business purposes, and more. LAP’s feature is similar to a personal loan; both can be used for multiple purposes. Therefore, many people find it difficult to choose between a personal loan and a LAP. Unlike a personal loan, a LAP has a lower interest rate and higher risk because you are mortgaging your land or building.
 
  • Longer tenure: 
The loan against property provides repayment tenure of up to 15 years. If you are planning to finance a long-term project or purchase a plant or machinery for your business, LAP is ideal for you. However, keep in mind that if you choose this financing option, the interest component will increase as the repayment period lengthens. Use a loan against property calculator to decide on the repayment tenure and the EMI.
 
  • High-income myth:
To get a loan against property, you don't need a high income because the lender retains your mortgaged property’s papers, which they can auction in the case of default to recoup the outstanding debt. Low income does not mean that a seasonal business owner with inconsistent income qualifies for a loan against property. Check the eligibility for a loan against property before applying for the same.
 
  • Mortgage property can be used: 
Putting up your land or building for getting a loan against property does not imply you cannot use your property. Your lender only undertakes the papers of your property; the possession remains with you. You lose your property only if you default on your LAP. 
 
  • No tax benefits: 
A loan against property does not offer any tax benefits. However, under some special circumstances, you can get the tax benefits under LAP. For example, if you are a salaried employee who took a loan against property to finance your new home, you can claim a tax deduction of up to Rs 2 lakh under section 24(B) of the Income Tax Act, 1961. Similarly, if you use LAP funds for business purposes, you can claim tax benefits on processing costs, interest charges, and documentation expenses under section 37(1) of the Income Tax Act of 1961.
 
  • Cannot sell mortgaged property: 
When you avail of a mortgage loan against vacant land or a building, you will not be able to sell it until the loan is paid off completely. Though, in some specific circumstances, if the new buyer of your mortgaged property is willing to repay the remaining LAP amount, the property can be sold.  To initiate this process and transfer the ownership of your property, you need to follow certain rules and regulations. 
 
Also Read: How To Make Sure Your LAP is Paid on Time

 

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Loan against property eligibility: 
 
To obtain this loan, you need to follow a simple loan against property procedure. To begin with, you must meet the qualifying requirements listed below.
 
  • You should be an Indian citizen with a minimum age of 25 years and maximum age of 75 years. 
  • You should be self-employed or a business owner who has a regular source of income.
  • You should have been in your existing business for at least three years.
 
Documents required for LAP: 
 
  • Mandatory documents: Duly filled application form along with the PAN Card.
  • Identity Proof: Driving Licence/ Photo ID issued by GOI/ Passport/ Voter ID Card/ Aadhaar Card
  • Address Proof: Voter ID Card/ Utility Bill/ Lease or Rent Agreement/ Aadhaar Card/ Registry Copy/ Property Tax Receipt/ Driving Licence 
  • Business Existence Proof: VAT/ Excise Tax/ Sales Tax/ Service Tax Registration along with a copy of partnership deed, registration certificate issued by the RBI or SEBI, trade licence, certificate of practice.
  • Signature Proof: PAN Card/ Passport/ Banker's Verification   
  • Income Proof: Income Tax Returns (ITR) for the last three years, last six months’ bank account statement, or business continuity proof for the last three years.
  • Property related documents such as registration papers, property insurance papers etc. 
 
Also Read: Benefits of taking a Loan Against Property

To Conclude: 
 
Taking a LAP is a major decision with long-term financial consequences. As such, it's critical to be familiar with all of its facets and obtain a loan that is completely aligned with the borrower's financial goals. Now that you know what is loan against property, what are loan against property eligibility criteria and the documents required for getting a LAP, you can easily make an informed decision.
 


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