Pros and Cons of Taking a Loan Against Property in India

"Paise toh lagenge hi, par itna zyada?"

This is a common reaction when people realize the cost of major expenses like business expansion, medical emergencies, or higher education. If you are in a financial crunch and own a property, a Loan Against Property (LAP) can be a viable solution. But is it the right choice for you?

Take this quick three-minute breakdown before making your decision. This article highlights the benefits and drawbacks of secured property loans followed by a comparison of SBI Personal Loans.

What is a Loan Against Property?

A loan against property (LAP) is a secured loan in which you use your home or commercial property as collateral to obtain money from a bank or financial organization. In exchange, you receive a lump sum payment, usually a portion of your property's market worth, ranging from 50% to 75%.

But should you take the loan? To determine that we need to evaluate both benefits and challenges of this approach.

Pros of Taking a Loan Against Property

1. Lower Interest Rates

Its secured nature allows Loan Against Property to offer interest rates that remain below personal loan and credit card debt rates. For example, the State Bank of India (SBI) provides LAP with interest rates beginning at 8.50%  per year. On the other hand, SBI Personal Loans provide interest rates beginning at 11.45% annually.

2. Higher Loan Amount

Loan against property works as the best option when borrowers require large sums of money. Hereby, the value of your property defines the loan amount you can access which usually ranges from ₹100,000 up to ₹100,000,00. For example, HDFC Bank offers loans up to 65% of the property's value.

3. Longer Repayment Tenure

Home Loan programmes allow longer repayment terms of 15-20 years because they differ from personal loans which typically need to be repaid within 1 to 5 years. This results in streamlined EMIs.

Example: Taking a ₹50 lakh LAP at 8.50% interest for 15 years will result in an EMI of around ₹49,847. A personal loan at 11.45% for 5 years would result in an EMI of around ₹1,09,000, which is more than twice the amount.

4. Use for Multiple Purposes

LAP differs from home loans because property ownership acts as security which enables borrowers to utilise funds for business expansion, medical emergencies, education expenses or home repairs.

5. Continue Using Your Property

The property ownership stays in your hands even though you have actively mortgaged it because you maintain full rights to use and rent or stay in your property. Unless you miss payments, it is still yours.

Cons of Taking a Loan Against Property

1. Risk of Losing Your Property

Since your property is collateral, failure to repay the loan can lead to repossession by the bank. This is the biggest risk of LAP.

Example: If you default on your ₹750,000 loan, the bank can seize your property, even if its market value is ₹100,000,00

2. Longer Processing Time

Property loans from SBI Personal Finance require a full processing time of 24-48 hours for payout while LAP disposition extends through various property cheques lasting up to 7-15 days.

3. High Processing and Legal Fees

For LAPs, banks charge processing fees (1-2%), valuation fees, and legal charges, which increase the overall cost.

Example: If you take a ₹100,000,00 LAP, you may have to pay up to ₹200,000 in processing fees alone.

4. Lower Loan-to-Value (LTV) Ratio

LAP only provides 50–75% of the value of your property, but a personal loan might provide 100% of the needed amount (depending on your eligibility). 

5. Market Fluctuations Can Affect Valuation

Property prices fluctuate. When property prices decrease banks often require additional security provisions and could request approval of your loan amount at a reduced value.

Should You Choose LAP or SBI Personal Loan?

LAP is a fantastic choice if you require a sizable loan amount with reduced EMIs and are comfortable pledging your house. SBI Personal Loan, on the other hand, can be a better option if you require immediate cash without running the risk of losing your property.

Conclusion

Getting a mortgage on your property offers smart financial benefits to people who need extensive funds at minimal interest rates. Fantastic though it may seem for financial purposes, a Loan Against Property puts your house at stake if you default on payments. If you need a smaller amount quickly, SBI Personal Loan might be the better alternative.

Before making a decision, evaluate your repayment ability and financial goals. Would you consider taking a Loan Against Property, or do you prefer an unsecured loan?

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About the Author

LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?