20 SEPTEMBER, 2022

A lending institution issues a loan against property to applicants who can pledge their assets as collateral for the loan. The asset is kept as collateral with the lender for the entire loan repayment tenure. Collateral backed loan is more secured since it has the potential to cover the entire loan in case of non-repayments.

Benefits of loan against property

There are various types of loans offered by lending institutions across the country. However, the benefits keep varying depending upon the need of the applicants and their capacity to repay the loan. One must choose wisely by understanding the terms and conditions associated with the various types of loans available in the market.

A loan against property is a collateral-backed loan and has some benefits. The advantages of availing of this type of loan are detailed below:

1. Amount of loan issued

The amount of loan issued through a loan against property can vary depending upon the value of the property used as collateral. It is often observed that the lending institutions extend a loan up to 70% of the value of the asset being pledged as collateral. Property used as collateral can either be for residential or commercial purposes. Since the asset's value is more than the loan being issued, it has the potential to cover the entire loan amount in case of defaults, making the loan more secured. With the loan being secured, the lending institutions can issue higher loan amounts than what an unsecured loan would offer. This benefits the applicants who can get more funds to cover their needs.

2. Better interest rate

The interest rate charged by the lending institutions primarily accounts for its risk—the primary risk of non-repayment of loans or defaults by the borrowers. The lending institutions charge high-interest rates for unsecured loans. However, this is not the case for loans against property. This type of loan is highly secured through the assets being pledged by the borrower, and this, in turn, reduces the risk of non-repayment or defaults and enables a lower rate of interest.

3. Interest on loan against property tax benefits

A loan against property also comes with tax benefits for the applicants. The borrower can exempt the amount of interest paid towards the repayment of this loan; however, the purpose of taking this loan should meet certain conditions to avail of these tax benefits.

(i) The borrowers are eligible to receive tax benefits on the interest amount paid during the loan repayment process when the loan is used for business purposes. In addition to the interest paid, the fee paid towards processing the loan is also eligible to be submitted towards tax benefits.

(ii) Purchasing a residential property is also an acceptable use for this loan to be eligible under tax benefits. When the borrowers use the loan against property to purchase a new property, they can receive tax benefits for the interest paid towards the repayment of the loan amount. The government prescribes an upper limit for this kind of tax exemption and requires documentation and proof that validates a purchase of a new property.

(iii) The borrowers can use the loan against property for other purposes such as leisure activities, education, and other personal activities, but this will not make them eligible to receive tax benefits for the interest paid towards the loan.

The loan against property tax benefits the borrower when used for the right purposes.

4. Tenure of the loan

The repayment of a loan taken against property can be spread over a long tenure. Considering the substantial amount of the loan, the lending institution offers the borrower an option of longer repayment tenure. The lower interest rate per annum ensures that the cost of the loan is not significantly impacted over a longer term. It is a crucial benefit since the longer tenure enables the borrower to repay in smaller installments and keep the cost in check. An unsecured loan, as compared, would require a large amount of equated monthly installment (EMI) when taken for a shorter repayment tenure. On the other hand, the cost of repayment increases when the repayment is made during the long term since the interest rate is higher for an unsecured loan. Hence, a loan against property is beneficial when it comes to reducing the cost of borrowing and the amount of monthly EMIs.

5. Helps meet the large-scale requirements

Obtaining a secured loan against property is always a good option when the financial requirements are enormous and immediate. The benefits are two-fold here:

(i) Processing time: The loan against property requires less documentation and processing time as compared to a non-secured loan. Since the loan is secured through the asset pledged by the applicant, it makes it less risky for the lending institutions, and their due diligence is restricted and can be quicker. The disbursement of the loan amount is quick and can meet any urgent requirements of the borrower. This is not the same in the case of any other types of unsecured loans. The lending institutions need additional due diligence when validating the borrower's credit worthiness in case of an unsecured loan, and understandably. The processing time to obtain an unsecured loan may take more time and may not possibly be able to meet a more immediate requirement.

(ii) Nature of requirement: The reason to procure a loan could be diverse, but a loan against property can meet all the different requirements of the borrowers – be it big or small. The borrower could need a big loan covering multiple conditions such as travel, wedding, renovations, funding an education, medical emergencies, or repayment of other debts that carry a higher rate of interest. A loan against property can meet diverse requirements at once.

The borrower is allowed to use any property as collateral and continue to use it while it is pledged with the lending institutions. The use of the property is left at the discretion of the lending institutions only when the borrower cannot repay the loan for any reason. The benefits of this type of loan far exceed those of any unsecured loan.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.

Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.