Loan Against Property

Loan against Property ( LAP ) is  very unique product which couples the feature of a personal loan and  a secured loan. This loan product helps in unlocking the value of the most precious asset: your Property. The end use of the loan is not monitored when compared to any other secured loan which generally comes with a specific purpose. In that sense, LAP is an any purpose loan, but at the same time secured by collateral of property.

This is one of the best tools for those looking at debt consolidation. There are several businesses which has obtained high cost funds like unsecured business loans and leveraged themselves to a greater extend, thereby putting pressure on higher interest cost and lower profit margins. LAP perfectly fits for such businesses to reduce their borrowing cost and consolidate debt at lower cost. The other advantage is the tenor for LAP loan is generally in the range of 7 to 15 years, thereby giving the borrower to plan business expansion among other things. Moreover with the appreciation of property, future requirements also can be taken care of. This allows the best use of the property that is owned and at the same time will enable the raising of funds required for various purposes. Also, a loan against property comes with a low interest rate compared to that of a personal loan or home loan.

Banks have  designed various products out of Loan against property. Traditionally,  LAP typically meant  a loan that will be available with the property as a security for the loan.

However with changing times and competition heating up, banks have come out with innovative products. The list below is indicative only and a few banks offer LAP as a combination of one or more  variant.

1. Term Loan ( TL )
2. Overdraft / Cash Credit ( OD / CC)
3. Lease Rent Discounting ( LRD )

Most nationalized banks structure loans in such a way there is a Term Loan component and other as a Cash Credit/ Overdraft component. The conditions for servicing the loan  are different and one need to be careful while choosing such combo products

Term Loan is the traditional offering where the bank sanctions a particular amount to the borrower as the loan against the property. The amount of loan is determined by the value of the property and the margin as well as the requirement that is present for the funds. The amount is then sanctioned to the borrower that he/she can use as per his/her requirements. The interest will be calculated based on the figure of the loan disbursed and the repayment schedule for the loan against property is then worked out accordingly. The borrower will then repay the loan through monthly installments as per the working and this will then complete the entire loan process.

Overdraft is another way in which the loan can be given and operated. Here, once the loan against property is approved for a specific amount the entire figure does not have to be taken by the borrower. Rather the borrower has the option to choose the manner in which he/she actually wants to operate the account and use the overdraft amount available to him/her. This means that the money can be withdrawn as per the need and this also results in a saving of interest cost because the amount of interest will be based upon the overdraft amount withdrawn and the time for which it is used. At the same time, the borrower can keep making deposits into the account as per the convenience and this will go on to reduce the outstanding overdraft amount. This again saves on the interest cost because the borrower pays interest only on the overdrawn amount for the applicable time. On an overall basis, the borrower can use the money till the limit that has been sanctioned and the amount of the interest will be calculated at the interest rate decided upon based on the actual situation. There is also the facility to renew the overdraft limit at specific time intervals whereas in the term loan offering the loan limit remains the same for the entire duration of the loan against property.

One of the most powerful loan product which unlocks the value of the property without denting one’ s pocket . Also a powerful tool for multiplying wealth. When compared to Term loan and Overdraft wherein the borrower’s eligibility is scrutinized based on the business income, LRD does not take into account the business income. Banks would look at the rentals , source of rental, rental period etc and sanction a loan. However bank would insist on escrowing the rent to their account to take care of the prepayment. The quantum of loan would depend upon the valuation of property, lease rentals, no. of years the lease has been executed etc. However banks look at such proposals only if the rent is coming from a known corporate/ entity.

The purpose of loan depends on the need which has arisen. The common reasons why a particular loan against property is required.

The common list of documents for both Salaried and Self Employed applicants are as follows:

Income proof of salaried employees  are payslips and bank statements
For self employed applicants, the following documents are required

• Income tax returns along with all supportings including audit reports for the past 3 years..
• Last 12 months’ bank statements of main business banking.

In addition, there are some other common documents related to the property that are also required to be produced.

• Original title deeds  of the property that is being offered  as collateral to loan.
• Property tax receipt.
• NOC from society to create mortgage of the property.