In a complex and competitive market, most people are constantly on the lookout for bridging funding gaps in their budgets. If you have a property in your name or your spouse name, don’t look to far. This property can be pledged to a bank or financier to get loan against property (LAP). Remember that this loan against property (LAP) is a secured loan given against residential or commercial property such as a house, shop, office, workshop, factory etc.
The lender will now have the first lien on the property, as a protection in case you default on loans. There are no real restrictions on the use of funds. You can use LAP funds for emergencies, family needs and for business expansion. However, it is advisable not to use such funds for speculative purchases as it can endanger your title to property, in case you are not able to repay the loan on time. Before zeroing in on the lender, you need to find out which bank is best for loan against property.
The only way to make the best of loan against property is to avoid some standard mistakes borrowers commit. Here are 6 mistakes to avoid.
1) Mistake of not doing your homework
This is a common mistake. What do we mean by not doing your homework? Before applying for loan against property, you must compare the rates of interest and other charges across banks. Don’t just look at the rate of interest but look at finer points like is it advance EMI, month-end EMI, foreclosure charges, administrative charges, processing charges etc. Your overall cost of the loan includes all these. Compare loans on all these parameters. Secondly, do not tap too many lenders, but look to deepen your relationship with existing lenders to get better deals. This helps you decide which bank is best for loan against property.
2) Ignoring the tenure of the loan
Any loan is a trade-off. Longer the tenure, lower the EMI but higher the overall interest cost you pay. The reverse holds true in case shorter loan tenures. It is tough to make a call, but use a simple thumb rule. Always take loans to the minimum extent needed and also look to repay loans quicker if such a facility is available. In fact, insist on such a facility. Normally, the tenure of the loan looks innocuous but can have larger implications for your costs.
3) Overlooking the fine print of the agreement
In legal terminology, it is said that the devil is in the detail. Go through the fine print as a lot of key clauses of the agreement can be in small print. In a loan against property, you must be clear about the rights of the lender and the borrower. It cannot be to your disadvantage. Also, check the fine print on prepayment charges, foreclosure penalty, processing charges, annual fees, penalties for delayed EMI payments etc.
4) Don’t forget, proof of the pudding lies in the eating
What we are referring to here is the disbursal time. What do you do with a sanction letter or in-principle approval? What matters is that the loan cheque is disbursed and the funds come into your account. Normally, the LAP disbursals are done within a week. However, in some cases, the process may take longer and in that case, you must check that such delays are OK for the urgency of your needs. Otherwise, find another bank that can disburse the loan quickly to help meet payouts.
5) Not evaluating smarter LAP options
Remember, when you apply for a loan against property (LAP), not all loans need to be in the form of EMI payouts. There are several other options. If you expect a lumpsum payback after a year, go for a one year loan with just interest payout and then repay the principal to reduce your intermediate outflows. Also, banks offer the overdraft kind of facility, where interest is only charged on the usage amount. That can be a smart way of using LAP for business needs.
6) Finally, do not neglect your CIBIL score
Quite often borrowers believe, rather erroneously, that CIBIL (credit score) does not matter in a secured loan like LAP. While the CIBIL score may not be as important in LAP as in the case of a credit card or personal loan application, it still matters. No bank wants to lend to a borrower with low credit profile. Also, if your CIBIL score is high, you can bargain with the bank for better terms and conditions for the loan.
Ensure that you don’t commit these 6 mistakes before deciding which bank is best for loan against property.