There are two different kinds of loans: secured loans and unsecured loans. Loan against property (LAP) is a type of secured loan in which the borrower pledges their residential or commercial property as security to obtain a loan from a lender, such as a bank or other financial services provider, for a specific amount. LAP is available to both salaried employees and independent contractors.
A Secured loan is a loan that is secured by your property. If you’ve ever wondered “what is a secured loan,” for instance, if you take out a homeowner loan, the lender has the right to seize your home if you don’t make your payments on time. To put it another way, where your credit is insufficient to be approved for an unsecured loan or for large loans used to buy a specific asset, a bank or lender may ask for collateral. Due to the lower risk they pose to lenders; secured loans may be able to offer borrowers lower interest rates. However, some secured loans, such as short-term instalment loans and personal loans for people with bad credit, may have higher interest rates.
An unsecured loan has no collateral, such as real estate or other assets, and is only guaranteed by the borrower’s creditworthiness. Since secured loans are safer for lenders to approve than unsecured loans, unsecured loans need higher credit scores. Unsecured loans include credit cards, student loans, and personal loans.
If a borrower defaults on an unsecured loan, the lender may hire a collection agency to recover the debt or file a lawsuit against the borrower. Depending on a borrower’s creditworthiness, lenders may decide to approve or deny an unsecured loan; however, laws shield borrowers from unfair lending procedures.
Lower EMIs due to lower interest rates than home loans are just one of the many advantages of LAP. Since LAP is a secured loan, getting approved to use them is also simple and quick. On LAP, there are also minimal or no prepayment fees.
Additionally, LAP typically has no end-use limitations. This means that the money borrowed against your property can be used for various things, including meeting your personal needs and funding your business, education, marriage, and other major life events. However, these are only some of the applications for LAP.
The following are the reasons for loans against property, according to Jairam Sridharan, MD, Piramal Capital & Housing Finance.
Purchasing a home
Purchasing a new home has many advantages, including renting it out to make extra money or using it as a vacation or weekend home. A loan against property is a great way to get money because it allows borrowers to get a loan and use a piece of property they already own as collateral. Additionally, the borrower may continue to use the existing property for residential or commercial purposes even after mortgaging it to the lending institution.
Longer repayment period
LAP typically has a flexible and longer repayment period, up to 15-20 years, compared to a personal loan. Additionally, a longer loan term results in a lower monthly EMI, which eases the borrower’s financial burden. Additionally, the borrower can partially prepay the loan amount at any time during the term with little to no prepayment penalties.
Finance the growth and expenditures of your business:
LAP has several advantages for business owners, including flexible end uses, relaxed eligibility requirements, and longer repayment terms. These advantages make taking out a loan against property beneficial for business owners. Regarding flexibility of end use, the funds can be easily applied to whatever urgent business need exists—capacity expansion, hiring staff, purchasing equipment, etc.
Plan major expenditures:
A borrower may use a loan secured by property for various purposes. It can cover any large expense, such as paying for your child’s college education, a trip abroad, a wedding, a medical emergency, or expanding your business. LAP may also be used for working capital needs, home improvements, or purchasing a new property.
Obtain a large sanction:
If a borrower needs large sums of money all at once, LAP is a good option. When borrowers pledge any property as security, lenders sanction between 65% and 75% of the collateral’s current market value. Depending on eligibility, the lending institution may give a borrower an even higher amount to cover their financial needs. As a result, the amount a borrower can access by choosing LAP is probably higher than they could with a personal loan.