How to Avail Tax-Free Loan Against Property

Need a personal loan but do not have the required CIBIL score? Fret not, you can avail of a loan against your property. A loan against property (LAP) is a financing option that involves availing of a loan based on the market value of your existing mortgage. In other words, a Loan Against Property is a type of secured loan that allows borrowers to use their property as collateral to obtain a loan from a lending firm. You can receive funds against any building, whether commercial or residential.

When availing of a loan against your property, the loan amount sanctioned by the lender depends on the value of the property being pledged, and the borrower’s ability to repay the loan. You can use the loan amount for various purposes such as business expansion, debt consolidation, education, medical expenses, etc.

LAPs usually offer lower interest rates compared to unsecured loans, as the lender has a lower risk of default. However, it is important to note that since LAPs are secured loans, if you fail to repay the loan amount, you may lose your property.

Benefits of Availing Loan Against Property

Here is a list of reasons why you can turn to your existing mortgage if you need funds.

• Lower interest rates: Since the lending firm has the borrower’s property as security, they are at less risk of losing money in case the loan applicant defaults on repaying the loan. Hence, you can negotiate lower interest rates if you are keeping your mortgage as collateral.

• Higher loan amount: Since the lender decides the loan amount based on the market value of the property, LAP is an ideal option if you need a lot of money. However, make sure to plan your expenses and ensure that you can repay a high loan amount comfortably.

• Longer repayment tenure: Lenders often allow a longer repayment tenure for loan against property. You can plan your expenses, set a budget, and comfortably repay the loan. When withdrawing the loan amount, make sure that your long-term goals are aligned with your financial situation.

• Continued use of property: One of the best benefits of availing of a LAP is that you can keep living in that property or renovate that property while the loan is ongoing. Whether it is a rented space or you have full ownership of that property, you can use the loan amount as per your wants.

• Partial fund disbursements: Another benefit of taking a LAP is that you can opt for partial fund disbursal if your lender allows it. It is especially beneficial if you are using those funds to renovate or construct a new property. You can take out the money in regular intervals based on what stage of renovation your property is in.

• Quick loan disbursals: If you have a stable income, good CIBIL scores, and your property documents and lease are in order, you can get your loan approved pretty quickly. If you reach out to reputed lending firms like Andromeda, you can access your funds even faster with minimal paperwork.

Tax Exemption on Availing Loan Against Property

Other than the above benefits, you can also receive tax exemption if you choose to avail of loan against property.

• If you use your LAP amount to meet day-to-day business operational costs, you can claim benefits against the interest incurred and other additional charges under Section 37 (1) of the Indian Income Tax Act.
• Under Section 24 (B) of the Income Tax Act, you can claim a maximum deduction of around INR 2 lakh rupees if you use the funds to purchase a new property. Please note that you can receive this deduction only if you can prove that you used the borrowed funds to buy a new house.
• You cannot claim any tax benefits if you use the LAP funds to renovate your existing property.
• Under Sections 24 (B) and 37 (1) of the Indian Income Tax Act, you can only claim deductions on the interest paid and not the principal amount.
• You cannot claim tax benefits if you use the LAP funds for personal reasons like going on a vacation, financing your wedding, or paying for your college education.

Cons of Availing of Loan Against Property

Here is a list of a few factors that you must take note of before applying for loan against property.

• Risk of losing property: The biggest disadvantage of LAPs is the risk of losing the property pledged as collateral if you fail to repay the loan. This can be a significant risk, especially if the borrower is unable to keep up with the EMI payments.
• Property value: Lenders evaluate the market value of the property pledged to decide the loan amount. However, the valuation process can be subjective and may not always reflect the true value of the property, which could impact the loan amount offered. For example, your mortgage may have had a higher value when it was bought compared to when you want to pledge it as collateral.
• Processing time: The processing time for LAPs can be longer compared to other types of loans, as the lender has to conduct a thorough evaluation of the property being pledged. However, reputed lending firms try to disburse your loan amount as quickly as possible.
• Additional charges: LAPs may come with high processing fees, legal charges, and other administrative charges, which can add to the overall cost of the loan. Make sure to clarify these charges with your lender before signing the loan agreement.
• May negatively impact credit score: If you fail to repay the loan on time, it may negatively impact your credit score, which can make it difficult to obtain credit in the future.
• Limited liquidity: Pledging a property as collateral can limit the borrower’s liquidity, as it may not be possible to sell or borrow against the property until the loan is repaid. Keep aside an emergency fund before you put up one of your biggest assets as collateral.

Is Loan Against Property Better than Unsecured Loans?

Whether you should keep your property as collateral or not depends on your individual circumstances and financial planning. If you have the income and credit score to avail of a personal loan without keeping anything as collateral, you may do so. However, secured loans are the best option to choose if you want lower interest rates and flexible repayment options. Even if you have average credit scores, you can keep your property as collateral and get your desired loan amount.

It is quite easy to go overboard when applying for loan against property. If you have a stable income and good CIBIL scores, it is likely that you will receive a higher loan amount. The best option to check if you can repay the loan comfortably is to use an EMI calculator. You can find an online EMI calculator for free at the Andromeda official website. Enter your desired loan amount, interest rates, and repayment tenure. It will display the EMI amount. Whether you are a salaried or non-salaried professional, make sure that you do not spend more than 60% of your income on paying monthly settlements.