Imagine this.

 

You have a secured job in Mumbai that fulfills your ambitions and aspirations. Soon, you decide to buy a house so that you could migrate to the heart of the city. To be able to make the purchase, you plan to take a Loan Against Property against your family property in your hometown. Your family was apprehensive, but you assured them that you had a well-paying job. In an impulse, you secure the loan and purchase your dream home, however, you failed to do something essential.

 

You were unable to create a plan of action.

 

You did not foresee the expenses coming and did not decide on how would repay the loan. In a recent mishap, you also lose your job and you have depleted your savings in making the down payment. With no source of income, it is backbreaking for you to meet your family’s needs and pay the EMI. That is when you realize why you need to prepare yourself before taking any decision that has huge financial implications.

 

Because as the adage goes, failing to plan is planning to fail!

 

Now for your benefit, we shall be listing down such common mistakes we have often seen customers making and discuss each in detail for you to make an informed decision.

 

Mistake #1: Not comparing interest rates

Just as you have to match the lender’s eligibility criteria, you should ensure that the lender’s offerings, i.e., interest rates, are aligned with your needs. While selecting a lender, it is essential that you research well and compare the interest rates through aggregator websites or your trusted financial advisor. Alternatively, if available, you can use a Loan Against Property EMI Calculator that helps understand your tentative EMI payable.

 

Pro-Tip: Research, compare and decide!

 

Also, before you undertake this exercise, it is imperative you understand certain aspects that affect your interest rate.

• Profile of the Borrower: Many borrowers assume that having a high income is sufficient to get a good deal on Loan Against Property interest rates. But this is only partially true. Several factors such as age, occupation status, and credit score & other factors as per the lenders policy are taken into consideration by the lender to decide the interest rate.

 

• Nature of the Property: The property you choose to mortgage plays a role in defining your interest rate. For instance, you can expect to get affordable loans on commercial properties than residential properties. Or your property in an urban area will fetch you a low-interest loan in comparison to a property that is on the city’s outskirts.

 

• Macroeconomic Factors: The country's economic standing, cost of funds in case of an NBFC and other macroeconomic factors play a crucial role in the interest rate of a loan offer. Suppose there is an increase in inflation, the cost of funds increases. This affects the rate of interest on loans along with other factors.

 

• Interest Rate Type: The type of interest you choose also affects the rate of interest you avail of on the loan offer. You can choose between a fixed and floating rate of interest. A fixed rate of interest will remain constant until the end of the repayment period, while a floating rate of interest will change based on the cost of funds, lender’s policies, and other market scenarios. Since it is subjective, a floating interest rate may usually be lesser than a fixed interest rate.

 

Mistake #2: Not opting for the right tenure

The loan tenure largely determines your EMI payout every month and thus, it is crucial to choose an optimum term. For instance, if you opt for a long tenure, your EMIs might reduce but it will result in a higher interest payout. On the other hand, if you opt for a lower tenure, it will increase the EMI amount but lower the interest outgo. In short, your loan should not affect your present liabilities and other long- and short-term financial goals.

 

Pro-Tip: Exercise prudence while choosing the loan tenure to make your EMIs pocket-friendly and serviceable without default.

 

While opting for the loan tenure, do consider the following factors which may affect your decision:

• Amount of Loan: The loan tenure depends on your required loan amount. As explained above, since the loan amount is spread over a longer time, the longer tenure makes loan repayment easier because the EMIs are lower. However, we advise due diligence of your finances before taking that call. This is subject to change as per the lender’s internal policies.

 

• Age & Occupation of Borrower: The loan tenure against your property will be determined by your current age and income along with such other factors as per lenders’requirements.

 

Mistake #3: Not reading the fine print

While borrowers spend considerable time deciding the co-borrower and tenure, it is also important to read the repayment terms and any additional charges that might be levied. Ensure that you understand the terms and conditions. This exercise will help you to find any hidden fees impacting affordability, forewarn you of any potential costs andenable you to negotiate with your lender better.

 

Pro-Tip: Seek help from a trusted financial advisor should there be a challenge in reviewing the fine print

 

While you read all the terms and conditions pay special attention to the following points in your fine print:

• Foreclosure Fees: According to the new RBI circular, individuals borrowing at a floating interest rate do not need to pay foreclosure fees. However, others borrowing at a floating interest rate must pay foreclosure fees. Moreover, those borrowing at a fixed interest rate must also pay foreclosure fees.

 

• Processing Charges: Most financial institutions charge a non-refundable processing fee amount for processing the loan application.

 

• Part-payment Fees: Individuals borrowing at a floating interest rate do not need to pay part-payment fees. However, non-individuals and those borrowing at a fixed interest rate are required to pay part-payment fees.

 

Mistake #4: Not checking your eligibility/credit score

At the beginning of the article, we mentioned the importance of meeting the lender’s eligibility requirements such as age, occupation, salary, existing financial obligations, and credit history. More often than not, when borrowers fulfill a lender’s criteria, they are refused a loan because of their poor credit score.

 

It is advised that you have a credit score before you apply for a Loan Against Property. You may not be aware, but your credit score depends on the following:

• Credit Payment History: The primary factor in determining your credit score is your payment history; even one late payment will lower your score. When assessing you for new credit, lenders want to ensure that you will repay your debt intime.

 

• Credit Mix: People with excellent credit frequently have a wide variety of credit accounts, including a vehicle loan, credit card, student loan, mortgage, or other credit products. To determine how successfully you handle a variety of credit products, credit scoring models look at the types of accounts you have and how many of each you have.

 

• Debts: Your repayment of debts is very crucial to your credit score.

 

Mistake #5: Not preparing the pre-requisites for your loan application

Only having a property to pledge as collateral does not automatically make a borrower eligible for a Loan Against Property. It has been observed that many times, loan applications get rejected because the borrower is not prepared with application prerequisites.

To ensure your loan application does not get rejected, we advise meeting these basic prerequisites:

• Ensuring your loan-related documents such as property documents are ready
• Ensuringyour existing bills and credit card outstanding amount are paid
• Ensuring you have factored in other related loan-related charges and fees while calculating EMI
• Ensuring you have a prepayment and repayment plan ready, incase of foreclosure or balance transfer

 

Mistake #6: Not making a repayment plan

While offering Loan Against Property, many lenders in the market offer flexible repayment options to borrowers, helping ease their burden. For instance, players such as Godrej Capital, offer their customers the option to customize their EMIs under Design Your EMI and installment payments as per choice, i.e., quarterly, or bi-monthly.

 

Similarly, borrowers looking to take Loan Against Property should consider customizing their repayment plan in line with their financial goals and repayment capacity so that the loan can be serviced without default. To know the overall EMIs that you need to pay, use a loan against property EMI calculator.

 

Pro-Tip: Upon EMI finalization, make a repayment plan and keep aside savings to ensure timely repayment of the dues. Also, since the entire value of the property is not financed, set aside some amount of money for down payment

 

Mistake #7: Not insuring your loan

Yes! You heard that right. It is advised that customers avail a protection plan in their financial interest. Such plans are for protection for your family against financial costs that follow life-changing events such as natural or accidental death.

 

Conclusion

Now that we have covered the common mistake in great detail, you can apply for Loan Against Property confidently! However, we still advise our customers to negotiate well with their respective lenders and read all terms and conditions carefully to make an informed decision that is best suited for you and your needs.

 

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 are for information purposes only. For more details, please refer to the product or service document and/ or connect with our customer representative before 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.