Highlights
- What Are Collateral-Free Loans?
- Benefits of a Loan Against Property Over a Collateral-Free Loan
Easy credit has opened several avenues for individuals who seek financing options without risking the depletion of their liquidity. One can select from several types of credit schemes such as a secured or unsecured loan based on their preferences and need. To make the most of one’s credit requirement, aspiring borrowers should understand the difference between each loan option and its implications.For instance, personal loans are unsecured loans while a Loan Against Property (LAP) is an example of a secured loan. Regardless, both loans can be used without any kind of constraints enabling you to spend liberally for a wide array of personal and business commitments.
What Are Collateral-Free Loans?
Unsecured loans like personal loans, auto loans, business loans, etc. do not require you to place any high-value asset like real estate or gold as collateral. Hence, they are often referred to as collateral-free loans. This type of loan comes at a higher rate of interest and has a shorter repayment tenor as compared to secured loans such as a Loan Against Property, which is obtained by mortgaging a residential or commercial property. Therefore, it is also known as a property loan or mortgage loan.
If you have an impressive credit history and are assured of making timely repayments, a Loan Against Property can be a worthwhile financial solution. It can fetch you high-value funding at relatively lower interest rates than any other loan.If one plans for the LAP according to the repayment schedule, placing your property as security may be the perfect way to utilise your asset for generating quick funds.
Read Also: Top Benefits of Loan Against Property Over Collateral-free Loans
Benefits of a Loan Against Property Over a Collateral-Free Loan
Due to its secured nature, a Loan Against Property comes with several advantages that can help borrowers in the following manner:
1.Get a Hefty Loan Principal
When you take up a mortgage loan, any property that you own has to be pledged as collateral. After running a series of mandatory checks on an applicant’s credit profile and his/her mortgaged property, lenders sanction a suitable loan amount that usually ranges between 70% to 80% of the property’s current market valuation. This ratio often depends on various factors like the type of pledged property, its location, age, amenities, infrastructure and accessibility. As compared to loan amounts offered on a collateral-free loan, the loan principal obtained against a property loan is larger which enables you to meet any sudden or planned financial need.
2.Obtain Lower Rates of Interest
A Loan Against Property is a secured loan and it reduces the lender’s risk since they can recover their losses through the collateral. This surety is the main reason why lenders are able to offer a lower interest rate on a LAP. Consequently, it brings down your interest outgo affecting the total credit cost. A reduced loan interest aids easier repayments fetching you an economical loan. In contrast, you cannot enjoy similar benefits when you opt for collateral-free loans as lenders normally charge higher rates of interest to cushion the lending risk.
3.Repay over a Longer Tenor
One of the major benefits of a property loan is that you can repay it over an extended duration. Depending on the maximum tenor offered by your lender, you can comfortably choose a flexible timeframe that lets you pay lower EMIs as per your budgetary allowance. This helps greatly when one has to repay a big sum of money.
A longer tenor coupled with a modest interest rate renders mortgage loans a convenient and cost-effective credit solution. Generally, a Loan Against Property can be availed for up to 18 years while unsecured loans have repayment tenors of up to 5 years. So if one obtains a high loan amount, it may raise the EMIs significantly, which can stretch their finances making repayments tougher.
Also Read: Pick the Right Loan Against Property Tenor
4.Enjoy Tax Benefits on Loan Interest Payments
Another striking feature of a property loan is that it allows you to get tax deductions on your loan interest pay-outs. It is important to note that these exemptions apply only if you use the borrowed funds for specific requirements. Given below are two sections of the Indian Income Tax Act, 1961 under which one can enjoy substantial benefits on a Loan Against Property:
- Section 37- As per Section 37 (1) of the ITA, borrowers can get a deduction when they use a Loan Against Property for business purposes. It gives you taxation rebates on the interest paid and the processing fees incurred as professional expenses.
- Section 24- If borrowers utilise the loan money to buy a residential property, they are entitled to tax benefits under Section 24 (b) up to a maximum limit of Rs. 2 lakh. However, while claiming these reductions, one has to furnish substantial proof concerning the use of loan funds in this respect.
Individuals cannot avail of any tax exemptions if they access the borrowed capital to meet personal expenses such as financing overseas or higher studies, family vacations, weddings and the like.
Also Read: How to Avail of Tax Benefits on a Loan Against Property
5.Handle High-End Expenditures Easily
A Loan Against Property offers a large loan amount at lower interest rates over an extended repayment period. This helps borrowers manage all their big-ticket financial commitments efficiently. At certain times, one needs hefty cash reserves for home renovations, debt consolidation, children’s education or medical emergencies. If one had to pay for these commitments from one’s own savings pool, it could adversely impact their financial health. This is when a heavy loan amount can come to the rescue. Nonetheless, it is advisable to always borrow as much as one really needs. When you plan for the loan prudently with the appropriate loan amount, your EMI repayments are not compromised at any stage of the loan tenor.
Summing Up
The obvious merits of a Loan Against Property over the collateral-free alternatives make it a favoured choice among most loan borrowers. Moreover, unsecured loans have numerous eligibility terms that one must fulfil; whereas, secured options like a property loan entails minimal documentation and fairly simple eligibility criteria. This makes it much easier for borrowers to obtain loans, especially in particular cases, when they may hold a less-than-ideal credit profile.
Over and above these advantages, if you find a lending institution that tenders other additional features and add-on benefits, it can boost your overall credit experience. Before you apply for a LAP, check for pre-approved offerings to grab customised loan deals and ensure a hassle-free application process. With the right planning and adequate groundwork, a Loan Against Property can prove extremely useful in managing your cash flow adeptly to meet your life goals.
