Why Collateral is Important When Applying for a Loan Against Property

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5 min 27 Feb 2023

Importance of Collateral for Loan Against Property

Highlights:

Reasons Why Collateral Matters When Applying for a Loan Against Property

About a decade ago, people used to be wary of taking Loans Against Property, primarily because these loans involve collateral, and people assumed that taking a Loan Against Property, essentially translated into risking one's ownership rights over the property pledged as security. However, with time, borrowers have realized that Loans Against Property are as safe as any other loan - when taken after proper financial planning, loans against property give borrowers immediate access to a substantial amount of money that can be used to meet expenses like home renovation or business expansion. Further, Loans Against Property are sanctioned at low interest rates and come with a long repayment period which makes repayment hassle-free and easy, some perks that no other loan option offers today. Therefore, this financing tool has become increasingly popular with borrowers these days.

If you are planning to avail of a Loan Against Property, you must do so after proper planning. Negotiate with different lenders for low interest rates as well as other important loan terms and conditions.Borrow only what you can easily repay and use good collateral. The property you pledge as collateral will play a key role in determining the loan terms and conditions. Let us look at why collateral matters in case of Loans Against Property.

Reasons Why Collateral Matters When Applying for a Loan Against Property

A Good Collateral Helps You Get a Low Interest Rate

Banks and lenders charge interest rates on loans to make up for the risk involved in lending money to the borrower. When the risk involved is higher, lenders charge a high interest rate and vice versa. In the case of Loans Against Property, the presence of collateral minimizes the risk involved for the lender and when the collateral used is a centrally-located property with all amenities and high resale value, the risk factor for the lender goes down further. Thus, a good collateral helps borrowers negotiate for and avail of a low interest rate on Loans Against Property. 

People Also Read: Loan Against Property for Doctors Interest Rates

Higher Loan Value 

Under a Loan Against Property, lenders sanction anywhere between 60% to 70% of the property's value as collateral. Thus, when you use a high-value collateral, the loan amount you become eligible for also increases. For instance, if the property you are pledging as collateral is worth Rs.5 Crore, your lender will sanction anywhere between Rs.3 Crore and Rs.3.5 Crore as loan. Properties located in posh areas and having good amenities, such as gym, swimming pool, club, etc., are valued much higher than properties located on the outskirts or old properties with no amenities. Thus, when borrowers need high loan value, they must use the best property they have as collateral.

A Good Collateral Enhances the Borrower's Negotiating Power 

In the absence of collateral, the borrower does not have much negotiating power. The scenario is simple - they need money urgently and since the lender is the only one who can give them the money they need; they must agree to whatever terms and conditions the lender proposes. However, when there is a good collateral involved, the lender knows it's a win-win situation for them. Thus, in this case, the lender wants to on-board the borrower as a client as much as the borrower wants to work with the lender. This gives the borrower better negotiating power, allowing them to negotiate for better interest rates, loan value, tenure and other important loan terms and conditions. 

The Collateral Allows People with Low Credit Scores to Avail of a Loan 

When it comes to loans, an individual's credit score is one of the key parameters that decides whether they can be extended a loan or not. If your credit score is low, chances are your Loan Against Property application will get rejected. However, if you are pledging a property with high resale value as collateral, it is highly likely that your lender will approve your Loan Against Property application even if your credit score is low.

With a Good Collateral, You Will Experience Quick Approval 

Lastly, when you pledge a high-value property as collateral, you will also experience quick loan approval. This is because your chosen lender will be keen to have you as their client. 

Also Read: Benefits of Loan Against Property Over Collateral-free Loans

Summary

If you need quick access to a substantial amount of money for a long period and on low interest rates, your best bet is to opt for a Loan Against Property and if you are blessed to have more than one property that you can pledge as collateral, choose to pledge the property that is more centrally located and has better amenities. This will allow you to get a higher loan value at low interest rates and better loan terms and conditions.

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