A loan against property (LAP), can serve as the ultimate solution for all your financial woes. It is a secured loan, wherein a real estate property (residential, commercial, or industrial) you own, can be kept as collateral with a financial institution, against which you will be offered a loan amount. The loan amount can be up to 70% of the property’s current market value. Tenure of the loan is usually up to 15 years. The fund can be utilized for any purpose. Many choose to take a property loan for marriage, travel, home repair, business set-up, medical emergency, or other big expenses.

However, before applying for LAP, there are certain things to consider, including mistakes that you should avoid making.

1. Not Comparing the Interest Rates:

The worst mistake to make when taking a property loan is to not check the rate of interest across leading providers. Interest rate comparison will give a fair idea as to which financial institution is offering the lowest one. After all, the interest rate affects the total cost of the loan, and thus, something you should never take lightly. Remember, financial institutions cannot charge a rate lower than the minimum MCLR as mandated by the RBI. LAP rate can begin at as low as 12%.

Depending on the property’s age, condition, loan amount, tenure, and other factors, an interest rate will be decided. Do not hurry to take a loan from the first provider, but compare the terms, charges, fees, and rate of interest to understand how much you have to actually pay for the loan, before taking the most suitable pick. Never miss knowing the lowest possible rate you can get on the loan.

However, the lowest rate is not always the best. Check for other charges, such as processing fee, verification fee, penalties etc before finalizing an offer. Most of the providers will tell you the lowest rate they charge, but it is not necessary you will be eligible for the same. Just like when you go shopping the starting price for a product is stated, but not the maximum price charged.

2. Not Checking the Eligibility Criteria:

Before applying for a loan against property, you should check the eligibility criteria. For, if you apply for the loan, but do not meet the eligibility criteria, the loan application would be rejected. For instance, the criteria for salaried individuals and self-employed individuals could be different in matters of the documents required, the maximum age of the applicant to the time of loan application/maturity, income required etc.

By knowing the eligibility criteria, you can avoid sending a loan application to a provider, who will obviously reject the loan application due to lack of you fulfilling the criteria for taking the loan.

3. Not Calculating the EMI:

Once you know the interest rate, loan amount, and tenure of the loan, you can easily calculate the equated monthly installment to pay. Now, you can forget to check this information, but doing so can mean two things – A) You will not know how much money to keep aside every month for repayment B) You will not have a clear idea as to how much money will be left to plan for other financial requirements, accordingly. Both scenarios do not sound promising and can cause debilitating results.

Sometimes the EMI amount can be overbearing on your finances. At that time, you need to check for other cheaper offers from financial institutions. Even if you think, you can manage the EMIs; you should know the exact monthly amount to pay towards LAP so that you are not in for a harsh surprise later. It does not help to miss an EMI since that would attract penalty and raise the loan cost, and even affect your credit score.

4. Not Understanding the Repayment Terms:

Which repayment scheme have you chosen? Is it a regular EMI scheme or any other repayment offer? You may often tend to skip reading through the repayment terms. Many times, banks have offered such as zero EMI until first three months or likewise, or greater amount of EMI in the initial years, and then lowered EMI amount until the loan maturity. Not understanding the repayment terms can create a financial mess, especially when you have to strictly monitor your spending habits and have too many liabilities at hand.

The lending institution may have more than one option of repayment, thus, you should check for all possible offers and choose the one that suits your pockets and needs. You must also understand the prepayment terms and know the ways of settling the loan, in case of an adversity. Always, take an informed decision by knowing the loan details properly.

5. Not Considering Your Other Liabilities:

Do you have any existing loans? Is your credit card bill payment overdue? Have you taken any soft loans? Do you have a huge financial responsibility on your shoulder that would make it difficult for you to repay the new loan? These are some of the questions you need to find an answer to before applying for a property loan. Keep in mind that a new loan can be sanctioned, only if you qualify as one who is financially dependable enough to pay the EMIs in time, be it a secured or an unsecured loan.

The bank/NBFC will check for your credit history to understand your creditworthiness. The credit check is a hard inquiry. Too many hard inquiries in a short-time affect your financial trustworthiness, lowering your chances of securing a loan. Thus, it is better to check for the liabilities you have, be aware of your credit score, and approach a new loan wisely by clearing out any debt that is outstanding for quite a time.

The above-mentioned mistakes are the ones you should avoid making when choosing a loan against property. Always check for loan scheme details before opting for one.

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