What are the benefits and the risks?
When we need money for urgent needs, the first thing we think of is a loan. However, some people find it difficult to decide which loan to apply for or whether a home loan is a good idea. While some concerns may be justified, financial experts claim that a home equity loan is one of the most secured loans and carries a lower interest rate than other options. It allows us to use the locked-in value of an asset while continuing to occupy the asset for the duration of the loan.
A home loan allows borrowers to use the money for a variety of personal and business purposes, such as starting a business or expanding to meet sudden medical expenses. This loan is also relatively easy to obtain as the lenders get collateral for the money they lend. It is in high demand because people can borrow a large amount (up to 70 percent of the property’s value), have flexibility on payments, and the interest rate is lower than other loans. The loan repayment term can be long resulting in lower EMIs.
Tax benefits can be applied to the interest amount on a home loan and generally lenders do not levy penalties on prepayment of the loan amount.
The waiting period for getting the loan is quite long and can be frustrating as the lenders check the applicant’s background to make sure the applicant is legitimate. Banks and other financial institutions also check applicants on their credit score, repayment ability, and other metrics, which is still time consuming. Another problem could be the valuation of the property to be pledged as collateral. Different banks evaluate properties based on different parameters, there is no defined standard / template.
The biggest risk, however, is that the lender has sole authority over the pledged property in the event the borrower does not repay the loan on time. The lender can restructure the loan or sell it to get their money back. He can still claim the remaining contributions if necessary.
The lender also takes into account the age, occupation and income of the applicant to determine his vulnerability and the interest rate. The interest rate may differ for commercial and residential properties, and the age and location of the property may also influence the amount approved or the interest charged on it.