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Understanding Loans for Plot Purchase

Loan on plots are situations where somebody desires to raise some cash for residential purposes by borrowing and buying pieces of land called loans on plots.

By Ajay Kumar
New Update
Understanding Loans for Plot Purchase

Purchasing a piece of land is a fundamental step to an ideal home construction process or property investment. However, it is not easy to secure the necessary funding for it. Plot loans are often confused with house-buying loans but they have distinctive features designed for people who want to acquire land for whatever reason.

This article will discuss the various types of plot loans and their advantages and disadvantages as well as the details of the terms and conditions involved while availing one.

What Exactly Is Plot Loan?

Loan on plots are situations where somebody desires to raise some cash for residential purposes by borrowing and buying pieces of land called loans on plots. However, unlike standard mortgages; these credits do not cater for the purchase of either constructed houses or other house finances; they just cater to acquiring the lands themselves.

Major Characteristics:

  1. Lower loan–to–value ratio (LTV) – A lower LTV ratio represents a smaller loan amount in relation to the value of the property as well as requiring a larger down payment from the borrower. Conversely, a higher LTV ratio means the lender is covering more of the property's cost.
  2. In general, banks are ready enough to lend you about 60%-70% maximum value which means that anything other than this responsibility falls entirely onto your shoulders.
  3. Research shows that plot loans are quite high on interest rates, thus making the monthly payments slightly higher than those of house loans.
  4. The repayment period for a plot loan is often shorter compared to its counterpart, which usually spans from 7 to 15 years.

Types of Plot Loans

Plot Loan for Residential Construction

This is the most common type of plot loan for people intending to build houses. Moreover, some lenders demand that construction should start within specific timelines like two or three years.

Loan for Plot & Construction

It offers one combined facility to buy land and support house finances or buildings on it simultaneously if money is available at purchase time. In this case, during the building period, money is given by stages depending on the development level.

Commercial Plots Loans

While most plot loans are used for residential purposes, there also exist loans available for individuals or companies engaged in commercial development.

Advantages And Disadvantages Of Loan On Plot

Pros

  1. Investment opportunity – Buying land is only lucrative as, over time, its price increases due to urbanization.
  2. Freedom to design and decorate – Since you are buying the land, you have the right to design it as you want and do with it whatever you want.
  3. Loans on plots have a lower EMI  when constructions start off. In some cases, lenders will allow interest-only repayment when the construction is going on. This makes your EMIs affordable.

Cons

  1. High-interest rates – This will make you pay more in terms of monthly repayments and aggregately over time.
  2. No immediate tax benefit — Until construction begins, it doesn’t attract tax benefits like with home loans.
  3. LTV ratio is low and thus, you have to make a higher down payment since these loans only cover 60%-70% of property costs.
  4. Harsh location rules – Usually, there are restrictions on the areas where the property can be located and needs to be within municipal layouts and approved land plans.

Eligibility Criteria: Plot Loan

  1. Age Limitation – Ideally, applicants should be between 18 and 65 years old.
  2. Income Requirement – Your earnings should be adequate enough to fund the monthly payments for the credit facility. Normally, the lender will want to know about your monthly salary or if you are a business person how much money you get periodically.
  3. Credit Ratings – You need a good credit score of at least 750 points in order to qualify for any type of loan at considerable interest rates.
  4. Job Status – Employees and entrepreneurs can both access plot loans but authenticity may vary in terms of documentation required to disclose your salary.
  5. Region Preference for Plot Selection – Ideally, it is better when the encompassing area of the house plot is within city limits or municipal boundaries where construction is allowed legally for residential purposes only.

Important Things To Know Before You Take Loan On Plot

1. Lenders Prefer Residential Plots

In most cases, financial institutions are interested in plots located within municipal limits or approved layouts. This is because such plots have the right infrastructure and necessary legal clearances that can support residential construction activity. Henceforth, most of the time, rural or agrarian areas do not meet the eligibility criteria set by lenders for this kind of financing option.

2. No Immediate Tax Benefits

Based on the available information, there are no instant tax benefits associated with plot loans unlike those found in the home loan sector. You can claim tax deductions under sections 80C (for principal repayment) and section 24(b) (for interest payment) of the Income Tax Act, but only after the house's construction is completed and you have taken possession.

3. Shorter Loan Tenure

The period provided for the repayment of plot loans is always very short compared to that of home loans which can be as long as between 7 and 15 years. Thus, your monthly installments on such loans would be heavier in amount.

4. Pre-Approval for Construction

In most cases, you are required to inform the lender of your plan to complete a house within 2-3 years after buying a piece of land. Some may ask for evidence that construction activities will begin within this duration, which might not be convenient for those who intend to hold on to their property while it appreciates in value and use it as an investment.

Tips for Applying for a Plot Loan

  • Check your credit score
  • Compare lenders
  • Plan your repayment

The Bottom Line

Taking out a loan on a plot may be a wise choice if you are planning on buying a piece of land for residential purposes in the future. However, they usually attract higher interest rates, have shorter repayment periods, and are location-dependent. Before taking the loan, it is critical that you know what it entails in terms of its conditions as well as advantages and disadvantages

In case you want finance to buy your land then think over it regarding the long-term goals you have set against your financial capability. To decide on the loan you should know its terms especially related to the plot it is meant for and compare different lenders while also being comfortable with its repayment structure. By planning accordingly, one can use a plot loan as a stepping stone towards owning property that could eventually result in building your dream house.

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