Loan against Property for Business Growth
Investing in your business and growing it is a dream come true for most people. If you are an entrepreneur, finance has a large influence on the fate of your business. Poor financial planning or limited funds can prevent your business from achieving its full potential. However, banking and financial institutions provide several options that can help you. Among these, a property loan is a common and affordable option.
A loan against property is as simple as it sounds. You can pledge your property and use it as collateral to get a loan. The lender will keep this property as a guarantee until you repay the loan. Once you repay your loan amount and interest, you are once again the property owner. The property can be seized if you do not repay the loan.
This article explains a property loan, its benefits, and some tax benefits!
What exactly is a “loan against property”?
A loan against property is financial assistance you take from a lender by keeping your property as collateral. The property you own is a guarantee to the lender that you will pay back the loan on time.
This property can be your house, a flat, or a piece of land. The lender, in return, charges you a rate of interest on the principal amount you have to repay within a specific period. Remember, you can still use or live on the property.
While the loan can be used for any expenses, we will focus on using the amount for business growth in this article. You invest this amount in your business and meet your business goals. Several banks and private financiers provide loans against property at convenient interest rates.
What are the benefits of using a loan against property to finance your business venture?
There are several benefits to using a mortgage loan to finance your business. These are the following:
Low rate of interest
Interest rates on loans against property are low. The low interest rate is to ensure you can pay off the loan. Banks often charge a low interest rate so that the maximum amount is invested in growing your business.
In India, the interest rates for a mortgage loan start at 8% per annum and can go up to 25% per annum. The interest rate depends on various factors. Most lenders will check your credit score, loan history, income, and property value before providing a loan against property.
Property utilisation
Obtaining a loan against property is far superior to selling the property in the long run. A loan against property is much better than selling your property. The reason is simple: selling is an irreversible deal.
Additionally, selling your home will result in a one-time lump sum payment. The amount will be the market price of the property. However, if you are living on the property, this can create two problems:
- You will have to look for a new place to live.
- The property value may decrease depending on the condition of the property.
In contrast, you will also get a lump-sum payment when you take out a mortgage loan. However, you will not have to face these two problems. The amount you get depends more on your income, credit history, etc. than on the condition of the property.
High loan amount
The loan amount that you get from your bank depends on many factors, and one of the main factors is the market value of your property. If your property has a high market value, the loan amount may also be on the higher side.
Banks will lend up to 65% of your property’s market value. In many cases, the loan amount can go up to INR 5 crore. This can also increase depending on your credit history, property location, the development of the area, and so forth.
Low-cost EMI
Loans against property have low EMIs. This is one of the major reasons for choosing a loan against property rather than selling it outright. The EMI is usually between INR 750 and 900 for every lakh borrowed. EMIs are far more manageable than a lump-sum payment.
Flexibility
Loans against property are highly flexible. The whole application process is transparent. Many lenders provide a self-tailoring option. You can choose the type of loan and the tenure of the loan. Many also provide a Flexi option. In this option, you only need to pay the amount you use rather than the entire principal amount.
Should you take a loan against property to finance your business?
It is difficult to answer this question objectively with one word. Financing a business is not very straightforward. You can apply for business loans, MSME loans, etc. to finance your business expenses. However, your eligibility for each loan and the interest rate vary. Therefore, you should compare all the options and choose the one that fits your requirements.
However, a loan against property does have some tax benefits. For mortgage loans used to finance business, you can claim tax exemption under Section 37(1) of the Income Tax Act. The tax exemption is claimed against interest paid and associated fees.
Conclusion
A loan against property is one of the most popular choices to finance business expenses. This type of loan depends on the market value of your property. Also, you can avail yourself of some tax benefits on both the principal and interest amounts.
You have to compare the different loan options available to you before choosing one. To determine the best EMI option, use a loan against property calculator. If you’re still not sure where to start, reach out to the experts at Piramal Finance and learn more.