Loan Against Property | Common Misconceptions and Myths

Some Common Misconceptions about Loan Against Property

The loan against property offers a person with funds by pledging their property as collateral. These funds can be used for consolidating existing debts, funding a wedding, financing child’s education or even purchase land for factory or business. One must always check for the various eligibility criteria for Loan against Property in India. There are certain myths and misconceptions that people usually hear while availing this type of loan. Before falling prey to such misconceptions on loan against property, make sure that the decision is taken based on real facts and not just some heard myths. Here in this article we try to burst some most common misconceptions on loan against property-

Misconceptions on Loan against Property

  • Misconception No.1: Taking a loan at higher interest rates is better than pledging property

Loan against property offers a person funds having higher value at lower rates of interest as compared to other type of loan options. If a person has good credit history, pays his debts timely, never misses EMIs, then they can always choose other financial options that are better. But loan against property is one of the most important financial tools that support the borrower in the longer time periods. It helps to maintain stability. So, one of the biggest conception on loan against property is invalid that one should take loan on higher rate of interest rather than this type of loan that provides more funds at less interest rates.

  • Misconception No.2: Rate of interest is higher for this type of loan

Another one of the misconceptions on loan against property is that the interest rate in this type of loan is higher. The truth is that the rate of interest over such a loan totally depends on various factors such as condition of the property, value of property, borrowers credit score, lender, market etc. Since, these are secured loans thus, the rate of interests are comparatively lower than other type of loans.

  • Misconception No.3: One can borrow loan amount up to the full market value of the property

Usually, the banks provide 70 to 90% of the market value of the pledged property as loan to the owner. A borrower gets a full value as loan is one of the misconceptions on loan against property. The exact value of loan amount depends on the policies of the lender and the resale value of the property.

  • Misconception No.4: One cannot use the property after pledging it as collateral

One misconception on loan against property that is commonly believed by the borrowers or applicants is that once the property is pledged as collateral for the loan, it cannot be used again by the owner till the loan is fully paid. This is not true. The owner has full rights to use the pledged property during the loan tenure period. The financial institutions get the rights to ownership only when the borrower is in default for the payment of loan.

  • Misconception No.5: One can avail loan against property on residential property only

This misconception on loan against property is totally baseless. One can receive the loan amount by pledging a property that can be residential as well commercial. The property must be on the borrower’s name that’s the only condition to avail the loan against property.

  • Misconception No.6: One has to have high income for applying for loan

The income bracket of the applicant does affect the loan approval process and application, as it is the base for the repayment ability for the banks and financial institutions. It is considered thoroughly, but this is a total misconception on loan against property, that higher income of the borrower must be there to avail this loan. Lenders only check the organized structure of the repayment in finances of the applicant. 

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    Author: Anil Agrawal
    EZYBIZ India Consulting LLP, New Delhi. The firm is business and tax consultancy firm providing consultancy in Taxation, Regulatory, Transfer pricing, Valuation, Corporate funding and Business set up matters. He may be reached at 9899217778 or anil@ezybizindia.in.