Everything You Need To Know About Loan Against Property
Want money for your Child’s wedding or to expand your business? Well, the money is already in your house! Loan against property (LAP) can be taken against a self-occupied residence or a commercial building. And, it is quite beneficial to do so.
Loans can generally be classified as secured or unsecured. Personal loans and credit cards come under the un-secured loans category because we are not pledging any of our assets (collateral) to get the loan. Housing loans, LAP, loan against shares and car loans come under the secured loan category as there are collaterals involved. Since LAP is a secure loan, the lending rate is generally quite low compared to other loans. For the same reason, the eligibility criteria for getting a LAP is also liberal. The repayment term can also be long ranging between 5 to 15 years.
When to look at LAP?
Though a housing loan and the LAP are secured against the property, LAP is on the existing property and the value of the property is released for productive activity. For a businessman looking to expand the business, a LAP comes in handy. As they do not have to look for costly sources and the processing is also much faster. A few banks may even give an overdraft facility against the property; this will help the business as interest will need to be paid only for the amount withdrawn. Funding for children’s education can also be done using LAP; also their marriages. But as a general rule, one has to be cautious when taking loans for expenses.
LAP has a number of advantages.
- Value of the asset owned is released for productive use.
- Processing is faster than a housing loan.
- Partial pre-closure is allowed without penalties.
- If the value of the property has risen over a period of time, a re-financing option can be used to increase the loan amount. This feature again is very useful for businessmen, who are on an expansion spree. They can use the same property to continuously build the business.
- The property continues to be in the ownership of the borrower. In case the borrowers are not able to pay the loan, they can sell the property and then settle the loan. This may leave surplus cash for the borrowers to restart their financial life.
- Banks generally do not give loans beyond 60 per cent of the value of house property and 50 per cent of the commercial property.
- New businesses generally cannot have access to LAP. They should have been in existence for at least three years. Salaried persons, of course, can get it if they are employed for over one year.
- There will be some processing charges usually in the range of 0.5 to 1 percentage points, depending on the support given by the bank. Some banks may ask us to do the running around to get the encumbrance certificate and legal opinion ourselves and charge us lesser.
Word to the wise
Fixed or floating: As in a housing loan, in a LAP, too, a decision has to be taken related to this. In a low-interest rate regime, it is better to go for a fixed interest rate. For floating rates, the increase and decrease bands have to be checked.
Overdraft or EMI: There is no EMI format in a LAP but only overdraft facility.
Assessment of property value: Support from the owners to give the deeds of recent sales in the neighbourhood will help the underwriters of the bank in assessing the value of the property better.
Partnership business: In a partnership, a LAP can raise some issues among the partners. Be clear on that front from the start.
What’s the status now?
LAP is the fastest growing segment among personal loans in this calendar year. At the same time, defaults in this segment are also high. Loans with overdues of over 90 days are termed as defaults or delinquencies. Borrower data from TransUnion Cibil show that while LAP has grown by 33 per cent as of September 2018, defaults also grew by 3.03 per cent in the quarter ending September. Defaults till September 2017 were only at 2.3 per cent.
With inputs from Sneha Sharon Mammen