Why are Loans Against Property Better Than Collateral-Free Loans?

Easy credit can several avenues for individuals who seek urgent financing options for various needs. 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. Unsecured loans can be used for a wide array of personal and business commitments, whereas, LAP comes with end-use flexibility and can be used to meet any housing or business related requirements. It can also be used for debt consolidation and comes with a long repayment tenor.

What are Collateral-Free Loans?

Unsecured loans including personal loans, auto loans, and business loans do not require you to place any high-value asset such as real estate and 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 can be an option to utilise your asset to generate 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 Substantial Loan Principal

When you take up a mortgage loan, a 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 loan amount depending on the property’s current market valuation. This ratio often depends on various factors such as 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 can help to meet any substantial financial need.  

2. Obtain Lower Rates of Interest

A Loan Against Property is a secured loan. It comes with a lower interest rate, which brings down your interest outgo. A reduced loan interest aids in easier repayments. In contrast, you cannot enjoy similar benefits when you opt for collateral-free loans as lenders may charge higher rates of interest.

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 as compared to unsecured loans. Depending on the maximum tenor offered by your lender, you can choose a timeframe that lets you pay lower EMIs as per your convenience. This can help when one has to repay a big sum of money.  

A longer tenor coupled with a low interest rate renders mortgage loans as a convenient and cost-effective credit solution. Generally, a Loan Against Property can be availed for up to 17 years while unsecured loans may have repayment tenors of up to 5 years. So, if one obtains a high loan amount, a shorter tenor may raise the EMIs.

Also Read: Pick the Right Loan Against Property Tenor 

4. Enjoy Tax Benefits on Loan Interest Payments

Another feature of a property loan is that it allows you to get tax deductions on your loan interest payouts. 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.

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 substantial loan amount at low interest rates over an extended repayment period. This helps borrowers manage their big-ticket financial commitments such as housing and business expenses efficiently. At certain times, one may need funds for home renovations, business expansion, or debt consolidation. This is when a substantial loan amount can help. However, it is advisable to borrow only what is needed. When you plan for the loan prudently with the appropriate loan amount, your EMI repayments may not get compromised during the loan tenor.

Summing Up

The merits of a Loan Against Property over the collateral-free alternatives can make it a favoured choice among loan borrowers. Unsecured loans have numerous eligibility terms that one must fulfil; whereas, secured options such as a property loan entail minimal documentation and simple eligibility criteria. 

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 get customised loan deals and ensure a hassle-free application process. With the right planning and adequate groundwork, a Loan Against Property can prove useful in managing your funds adeptly to meet your financial requirements.