The Loan Against Property (LAP) concept is not foreign to most of us. In simple terms, it’s a loan disbursed or given against one’s property mortgage. But, like most financial services, the underlying details of LAP can get complex, especially when it comes to charges. Now, you might be wondering about the fees and their effects on your loan. To answer these questions and more, this comprehensive article is to help you understand the different types of charges on loan against property.
Understanding the Concept of Loan Against Property
A Loan Against Property, or LAP, is a loan you get by pledging your property as collateral. This could be a residential house, commercial property, or even a piece of land. One of the significant benefits of a LAP is that it allows you to unlock the monetary value of your property while still retaining ownership. However, it is crucial to understand the various charges on Loan Against Property to avoid any financial surprises down the line.
● Interest Rates
Interest rates are essentially the cost of borrowing. It’s what lenders charge for letting you use their money. There are two main types of interest rates on LAPs:
● Fixed Interest Rates: The interest rate remains constant throughout the loan tenure. This rate type is ideal for those who want predictability in their repayment plan.
● Floating Interest Rates: In contrast, floating interest rates fluctuate according to market dynamics. If you’re willing to take the risk of market volatility, this option might be for you.
The rate you receive depends on several factors, including your credit score, loan amount, loan tenure, and the lender’s policies.
● Processing Fee
The processing fee is a charge that lenders levy to cover the cost of processing your loan application. This fee usually ranges between 0.5% to 1% of the loan amount, depending on the lender’s policies and the type of property you’re pledging. Before you move on, don’t forget to check out a loan against property EMI calculator to see what a rough EMI amount might look like against the amount you’re taking the loan for.
It’s important to note that the processing fee is usually non-refundable, even if your loan application is rejected. This charge will be deducted from the loan amount before disbursal, so factor it in while calculating the actual amount you’ll receive.
● Prepayment Charges
Prepayment charges come into play when you decide to pay off your loan before the end of your loan tenure. The lender may levy a prepayment charge on the outstanding loan amount in such cases.
Here’s how it works:
● For floating rate loans: As per the Reserve Bank of India’s (RBI) guidelines, no charges are applicable for prepaying floating rate loans.
● For fixed-rate loans: Charges are applicable as per the lender’s terms and conditions.
Make sure to check your lender’s prepayment policy before deciding to pay off your loan early.
● Loan Conversion Charges
The conversion of a loan refers to a change in the interest rate type (from fixed to floating or vice versa) or a shift from a higher interest rate to a lower one within the same type of interest rate. This process incurs a conversion charge. The conversion fee is usually a certain percentage of the outstanding loan amount. It may vary from one financial institution to another.
● Late Payment Penalty
Failing to pay your EMIs on time leads to a late payment penalty. This charge is typically calculated as a percentage of the EMI amount. It is important to maintain timely payments to avoid this penalty, as frequent late payments may also affect your credit score.
● Legal and Technical Evaluation Charges
Banks and financial institutions conduct a legal and technical evaluation of the property before approving the loan. This process verifies the legal validity and technical soundness of the property. Charges for these evaluations are usually a fixed amount but may vary based on the lender and the value and location of the property.
● Cheque Bounce Charges
In the case of EMI payment through cheques, if the cheque bounces due to any reason like insufficient funds, the bank will levy a cheque bounce charge. This charge is generally a fixed amount per bounced cheque. You can always check out the loan against property EMI calculator to see a rough amount you’ll have to pay every installment.
● Insurance Premium
Although not technically a fee, lenders might require borrowers to have insurance for the loan. The cost of the insurance premium will be included in the total expense of the loan. This insurance safeguards the lender’s interest if the borrower cannot repay the loan due to unforeseen circumstances.
Understanding the various charges associated with a loan against property is critical to managing your finances effectively. Knowing these charges helps you plan your loan repayment better and avoid any unwanted financial upsurges. Before signing any loan agreement, make sure you read the fine print and ask your lender about all applicable charges. Remember, informed borrowing is smart borrowing!