Top Benefits of Loan Against Property Over Collateral-free Loans

When it comes to availing of money to take care of a personal or professional emergency, borrowers can either opt for a secured loan or an unsecured loan.  

Secured loans are loans backed by an asset. Home loans and loans against property are the two most popular types of secured loans. In the case of secured loans, a borrower pledges an asset - in most cases, a residential or commercial property - as collateral. This asset is the lender's security for lending money to the borrower. In case the borrower defaults on the loan payment, the lender can sell the property for loan recovery.  

Unsecured loans, on the other hand, are not backed by any asset and therefore, carry the maximum risk for the lender. A personal loan is a type of unsecured loan. While both loans have their advantages, there is no denying that the benefits of a Loan Against Property clearly outweigh the benefits associated with unsecured loans, such as a personal loan.  

This article focuses on benefits associated with collateral loans on property. So, if you are planning to take out a loan in the near future, this article is a must-read for you.

Top Benefits of Collateral Loans on Property Over Unsecured loans 

Until a few years ago, people used to be highly sceptical about availing of a loan against their property. However, over the past few years, the growing popularity of home loans, which are also a type of collateral loan on property, has made people grow comfortable with the idea of taking a loan against a property. What are the advantages of a Loan Against Property? There are many, read on to know more. 

Low Interest Rate 

The biggest advantage of a Loan Against Property is that lenders sanction these loans at low interest rates.  

Loans against property are backed by collateral. The risk involved for the lender in lending money is offset by the presence of the collateral. On the other hand, in the case of unsecured loans, the absence of security increases the risk factor for the lender. Therefore, to cover up for this risk, lenders charge high interest rates on unsecured loans, such as personal loans.  

Currently, loans against property interest rates vary between 9.75%* and 18.00%* p.a. Personal loan interest rates, on the other hand, vary between 11% and 24%. Thus, there is a vast difference between the interest rates that lenders charge on these two loans.  

Loan Value 

The loan value one gets under a Loan Against Property depends on the value of the property pledged as collateral. Lenders sanction anywhere between 60% to 70% of a property's value as a loan. If you are pledging a property worth Rs.5 Crore, your lender will agree to sanction anywhere between Rs.3 Crore to Rs.3.5 Crore as loan against it.  

Under a personal loan, however, borrowers cannot get access to a substantial amount of loan money. In general, lenders cap the loan value at Rs.25 Lakh.  

Therefore, when people need money for a big expense, such as paying for a wedding or starting a business, funds availed of under a personal loan often prove inadequate.  

Long Repayment Tenor

Loans against property are big-ticket loans. Therefore, lenders give borrowers ample time to repay these loans. In general, borrowers can get anywhere up to 18 years to repay a Loan Against Property. This gives borrowers ease of mind and ability to repay the loan in the form of affordable EMIs. 

In the case of personal loans, however, borrowers are expected to clear loan repayment within 5-7 years. This can sometimes make paying off the loan a burden. 

Also Read: Tips to Manage Loan Against Property Repayments Efficiently 

Continued Usage of Property

 Though a Loan Against Property involves collateral, borrowers must know that under this kind of loan, the ownership rights of the property stay with the borrower. The borrower can continue to use the property however they like. As an example, if you pledged your shop as security and took a loan against it, it does not mean you have to stop using your shop. You can continue to use it the way you were using it before you took a loan against it. 

A Loan Against Property allows you to unlock the value locked in your property while also giving you the right to continue using it the way you like.

Tax Benefits

Yet another big advantage of a Loan Against Property is that it comes with tax benefits. However, these tax benefits on loan against property are applicable only when an individual uses the money for certain specific purposes. 

If the borrower uses the money for business purposes, they can claim tax benefits under Section 37 of the Income Tax Act. If the borrower uses the money to buy or construct a home, they can claim deductions up to a maximum of Rs.2 Lakh per annum on payments made towards interest repayment under section 24(B) of the Income Tax Act and up to a maximum of Rs.1.5 Lakh per annum on payments made towards principal repayment under section 81C of the Income Tax Act.

Manage All Your Expenses with a Single Loan

Since loans against property are big-ticket loans, they give a borrower enough money to be able to take care of several different expenses. In other words, you can take one loan and use it to pay for a wedding, your child's education, debt consolidation, etc. This is not the case with personal loans which give a borrower only enough money to take care of a specific need.

Final Words

Secured loans, such as loans against property, offer several benefits over unsecured loans, such as personal loans. If you need money urgently and you own a property in your name, unlock the value hidden inside the property by taking a loan against it. t

Also Read: Why Professional Loans Against Property Are Financially Beneficial?