You can enter a financial crunch at any time. To meet your needs, you can arrange funds from various sources like personal savings, contribution by family and friends, or NBFCs in the form of loans. One such loan that gives you a sizable amount of fund and comes at affordable interest rates is a loan against property.
Loan against Property (LAP)
It is a loan type where you keep any property as collateral with the lender. This makes it a secured loan. The lender can auction this property to recover the loan amount if you fail repay the loan amount on time.
Purpose of loan against property
The loan that you avail against your property can come to any use you like. Some of the most common uses are:
• Higher education of your child in India and abroad.
• Medical urgency
• Wedding planning
• A vacation
• Business set-up, expansion, or diversification
LAP can also fund the purchase of a new house, its decoration, acquisition of new property, or extension of the present infrastructure.
Tax benefits of LAP
The loan against property not only gives you funds that you need in an emergency, but it is also eligible for tax exemption under the Income Tax Act, 1961, of India. You can enjoy tax exemption on the loan amount and interest under different sections of the IT Act.
- If you utilize the money from a loan against property for business activities, then the interest amount that you pay on credit and the loan processing charges get exempted from tax under Section 37(1) of the Indian Income Tax Act. The interest amount and the processing fees are the business expenditures under this section.
- If you are a salaried individual, then the interest that you pay is eligible for tax exemption under Section 24(B) only if you use the loan funds for purchasing another house or residence. The maximum interest amount deductible under Section 24(B) is Rs. 2 lakhs.
Type of properties for LAP
You can pledge a variety of features to avail this loan. It can be your own home, a property put out on rent, a piece of land, or an under-construction property. The only necessary condition is that the property should be free of any other mortgage loan and must be undisputed. The property may belong to you, a family member, or a friend who is ready to pledge it for you.
The loan amount
It is not only the market value of your property that decides the loan amount. The lender also takes into account your age, income, family’s consolidated earnings, and other liabilities. Generally, the maximum amount of loan that you get from the lender is 60% of the market value of your property.
Other benefits of loan against property
Loan against property has many benefits to offer. Some of these are:
- Lower rate of interest: As this loan is a secured one, the loan against property interest rate is comparatively more economical than other investments, especially, a personal loan. The interest rate for loan against property ranges from 12% and 15%, depending upon your eligibility and the lender’s loan terms.
- No foreclosure charges: If you want to repay your full loan amount before the end of the tenure, you generally have to pay some penalty or fee. But most lenders do not charge any foreclosure charges in case of a LAP.
- Quick processing and disbursement: The processing and payment of loan against property are easy and fast, as it is a secured loan. The documentation is also fewer, and the entire process is hassle-free.
- Long tenure: LAP comes with a longer tenure as compared to other types of loan, like a personal loan. The mandate of this loan is generally 15 years.
- Low and pocket-friendly EMI: The EMI depends upon the loan tenure. You have to pay a higher EMI if you select a shorter tenure and vice versa. The loan against property comes with longer tenure and hence has lower and affordable EMI. The lengthy tenures are suitable for those who cannot afford to pay higher EMI, but longer tenures also carry with it the higher rate of interest.
Considering all this, loan against property is an ideal choice to get finance during an emergency and is also an excellent tool for tax saving.