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Myth Busters: Decoding Myths vs. Facts for LAP
SITUATION:
Raj urgently required a huge sum for his son’s education abroad. While he tried to gauge the value of all his assets, he realized it wasn’t enough! He thought of mortgaging his family property, but his decision was opposed by his family. They advised Raj to take up some other loan from the bank.
During this time, Raj’s friend suggested he talk to a financial expert. He helped sift through the myriad of myths attached to Loan Against Property, and convinced Raj that this was a secure option. |
At some point in time, we all have experienced a situation similar to Raj. We have all fallen prey to hearsay, self-proclaimed experts, or just information through unverified sources about Loan Against Property. Well, because, false or inaccurate information.
In today’s day and age, false or incomplete information is a pressing issue, especially, when related to matters of personal finance. Thus, we’ve tasked ourselves to dispel common myths around Loan Against Property and furnish you with facts that enable an informed decision to fulfill your ambitions and truly grow your worth.
However, before we begin, let us begin by explaining what a Loan Against Property or LAP is. As a concept, LAP is a type of loan in which a borrower can deploy the value of a property by mortgaging it for personal or business needs while continuing to occupy the property during the tenure of the loan. In simple words, Loan Against Property is a loan that you can get by keeping your residential/commercial property as collateral. The funds received in Loan Against Property can be used towards weddings, vacations, higher education opportunities, business expansion, medical emergencies, etc.
Top 7 Myths About Loan Against Property
You must've heard many say, "But, oh dear, LAP is not a safe option. What if you lose your property to LAP." But please sit back and relax as we decode the top 10 myths about Loan Against Property for you.
Myth #1: You can’t live in the property you have set up as collateral
Fact: This is misinformation. Even if you have set up your property as collateral, you have the right to live in it or put it up for rental. However, this right can be revoked if you delay or fail to make the EMI payment on time. The Lender will have the right to enforcement under SARFAESI Act, 2022 in case of default in repayment.
Myth #2: Your property will be owned by the lender if you opt for Loan Against Property
Fact: As mentioned earlier, opting for Loan Against Property doesn’t alter the ownership status of your property. You will continue to possess your property, provided your EMI payments are on time. While it is true that while availing of the loan, a borrower is required to provide the original documents of the property to the lender. But one gets the documents back upon completing the due re-payment and final settlement.
Myth #3: You can only avail of a loan against residential properties
Fact: The flexibility of Loan Against Property is one of its defining characteristics. So, a borrower can avail of LAP against industrial properties, commercial properties as well as residential properties. The property can be single-owned or co-owned. However, please note that the LAP procedure may differ for each property as it involves collateral and paperwork. We advise that you check with your preferred lender or contact their customer representatives to get a complete understanding.
| Pro-tip: Do not use your agricultural property as a collateral as this property is usually not taken as mortgage for Loan Against Property. |
Myth #4: You have to pay a high-interest rate for Loan Against Property
Fact: A common misconception around loans is the interest rate. Even for Loan Against Property, the interest rates depend on the borrower’s profile, credit score, loan tenure, and type of property mortgaged. So, if your credit score is 650 and above, you may avail of Loan Against Property at competitive rates.
Myth #5: You should always opt for the lowest interest rates under LAP
Fact: Another interest rate-related myth we’d definitely like to bust! While lower interest rates seem alluring, you need to check and factor in all the charges and fees associated with LAP. Also, we advise checking your preferred lender’s reputation as well as post-sale services. In short, it is advisable you spend some time researching online before you select a lender purely on the basis of interest rates.
Myth #6: You can only avail of LAP if you fall into the high-income bracket
Fact:This is false. Apart from a good credit score, a borrower is required to have a sufficient income level. Income levels usually determine the repayment capacity of the borrower. An individual without a stable source of income has a higher risk of default, resulting in getting loans at higher interest rates. On the other hand, higher income levels result in better interest rates on the loan.
Myth #7: Your LAP loan involves shorter tenures
Fact: Contrary to the myth, the tenure for Loan Against Property involves longer tenures which may go up as high as 20 years. Today, in the market, there are several players such as Godrej Finance that offer longer tenures up to 25 years as well.
| Pro-tip: Choosing the ideal tenure is important to reduce your overall loan burden. For instance, if you are a young applicant, we advise opting for a longer repayment tenure. |
Myth #8: You do not need insurance to protect yourself from unforeseen risks
Fact: This is a common myth amongst customers! However, whenever you opt for LAP or any loan, it is advisable to protect yourself with equal insurance coverage, apart from your existing insurance. Getting insurance coverage is a way to protect your family, in case there is an unfortunate event, such as the demise of the principal borrower. While choosing your lender, always remember to check the insurance providers your lender has partnered with.
Myth #9: You can use the amount sanctioned against your property for any use
Fact:Similar to gold loans, a LAP sanction comes with no end-use restrictions, making it a sought-after funding option. Funds received against a pledged property can be used for multiple purposes such as to fund a business expansion or your child’s wedding or education or vacation or furnishing a home. However, these funds cannot be used for speculative or illegal purposes.
Myth #10: LTV ratio can go up to 100%
Fact: Most borrowers have the misconception that the loan can be sanctioned for an amount as high as 100% of the market value of the property. However, that is not the case. The LTV ratio is usually calculated based on the property's valuation report. Usually, the LTV ratio ranges between 40% and 75% for Loan Against Property. However, some lenders, such as Godrej Finance, offer a maximum LTV of 80% on select property in the market.
| Pro-tip: Before you make an informed decision, let us understand what is a ‘Loan to Value’ Ratio (LTV). An LTV ratio is the percentage of the property value that a financial institution lends to a borrower. |
Conclusion
We have all been prey to people talking about finance with no facts to back up their statements. Or we have asked our friends to help with a loan or investment-related decision. But, the accuracy of this information always remains questionable.
But now, with various myths decoded, you can take an informed decision and opt for Loan Against Property in times of exigency or fulfill your ambitions. However, we advise you to research and verify all the documents before taking the plunge. Also, once decided, check for the terms and conditions provided by the lender.
Godrej Capital through its subsidiaries, Godrej Housing Finance and Godrej Finance, offers products such as Home Loans, Loans Against Property, Balance Transfers, and many more. To know more about our offering, click here.
Disclaimer: The names used in this article are fictitious and are used for representational purposes only.
The contents of this article is for information purpose only. For more details, please refer to the product or service document and/or connect with our customer representative prior to making any financial decision. The information is subject to update, completion, revision and amendment and may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its affiliates to any requirements. Godrej Capital or its affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.
