A loan against property (LAP) is a secured loan that banks, property finance companies and NBFCs provide against residential or commercial property. These loans are generally offered at a lower rate of interest than personal or business loans and are repaid in a reasonable time. Anyone who has used the property can avail of such loans, whether they are employed in a company or professional institution or are self-employed. The amount of credit accepted is also higher than other options available.

The demand for LAP is Increasing among individuals for three main reasons:

• It is cheaper than a personal loan;

• The applicant can continue to live in his property even after the loan is issued.

• The loan can be used for many purposes, such as unexpected medical expenses, higher education and child marriages, or to start a business.

• Also, existing customers of a bank or property finance company do not have to go through the document review process again.

A property loan is a blessing for both entrepreneurs and employees. Self-employed people looking for a means to grow their business can take advantage of this facility. Employees experiencing sudden medical crises may require prolonged treatment, including expensive surgeries, or may benefit from the ability to raise funds by sending children to a foreign university for higher studies. A LAP not only preserves one’s savings but also offers an affordable EMI with a payback period of 15 to 20 years. Lower interest rates on such loans reduce the repayment burden.

All these and other benefits contribute to the development of the business or to secure the financial future of the loan applicant as well as his family. The only criterion for a loan against property is that the loan must serve a legitimate purpose.

Although it is relatively easy for existing customers to obtain a loan on their property, new customers will need to have the necessary documents as well as the property’s credit rating, repayment capacity and mortgage.

An existing customer top-up can also apply for a loan but depends on factors such as the repayment history of the previous loan and the loan-to-balance ratio for the loan, monthly income and property value. However, a new property valuation is not required as the property is already mortgaged to the lender.

While these are the basics of a property loan, there are other aspects of the loan that applicants should be aware of. These:

Payment of loan:

Since the loan amount is available for the property, the borrower must meet the required income criteria to repay the entire loan. It can be repaid for a period of 12 months to 20 years, although the tenure varies from lender to lender.

Property Appraisal:

The loan against the property is given against the collateral; I.e. property like a built residential/commercial property. Before deciding on eligibility and loan amount, your lender will evaluate your property. The amount depends on the current market value, not the past or potential future value. Property finance companies typically provide 50 to 60 per cent of the market value of a property. Therefore, you should analyze the loan to value ratio (LTV) provided by your lender.

Property:

The lender will not approve the loan until you acknowledge that your property has a clear and marketable title. Besides, co-owners must be part of the loan and meet the criteria.

Term of office:

Any property loan has a longer repayment period than a personal loan. The EMI is spread over many years, and the interest rate is meagre. Longer tenure means lower EMI, which reduces the monthly repayment burden.

Repayment Capacity:

The lender will evaluate your repayment capacity based on your income statement, repayment history, current loan etc.

To sum up, a loan against property offers greater flexibility, lower interest rate, higher loan amount a longer repayment period, as well as longer profitability. While the long-term benefits of this type of loan make it a much better choice than a personal loan, it is important to keep in mind.