Loan against property (LAP) allows you to leverage your existing property to raise funds for your personal or business needs without losing its ownership. Both residential and commercial/industrial properties, including vacant plots, can be used as collateral for availing LAP. Here I will list out some major benefits of availing LAP.
No end use restriction
Just like personal loans, there are no restrictions on the end usage of LAP loan proceeds. Except for speculative purposes or any illegal activities, LAP borrowers are free to use the loan amount to finance as diverse needs as home renovation, child’s higher education or marriage expenses, medical emergencies, international travel or any other personal purposes. Self-employed individuals can also avail LAP to finance their business expansion or raise working capital.
Longer loan tenure
Lenders usually offer loan tenure of up to 15 years in case of LAP. Some lenders offer loan tenures of up to 20 years also. When compared with other loan options having no-end usage restrictions like personal loans, gold loans or loan against securities, LAP offers the longest loan duration. In case of personal loans, lenders usually offer loan tenures of up to 5 years, with a few lenders offering maximum loan tenures of 6 or 7 years.
As longer tenure results in lower EMIs, it increases the borrower’s ability to afford big ticket loans. Hence, applicants who cannot avail big-ticket loans due to their lack of repayment capacity can consider LAP with longer tenures.
As longer tenure results in higher interest cost, LAP borrowers can later make prepayments to reduce their interest cost. Note that just like other floating-rate retail loans, lenders do not charge prepayment/foreclosure fee on part-prepayment or foreclosure of LAPs availed by individual borrowers at floating interest rates.
Non-individual borrowers should check with the lenders regarding the prepayment/foreclosure fees charged, if any, on floating rate LAPs.
Larger loan amounts
In case of LAP, the loan amount is usually determined on the basis of the market value of the underlying property and the repayment capacity of the loan applicant. Lenders may sanction up to 75% of the property’s market value as LAP loan amount. When coupled with the benefits of higher affordability and eligibility due to longer tenures, LAP becomes an ideal option for those seeking to finance big ticket expenses.
Lower interest rates
The secured nature of LAPs reduces the credit risk for the lenders as they have the option to sell the property in case of a default by the borrower. Lenders, thus, pass on this benefit to their LAP applicants by offering lower interest rates than personal loans.
The difference can be significant for loan applicants having low credit scores as most lenders usually charge very high interest rates for personal loans offered to individuals having low credit scores.
Higher chances
As lenders have the option to sell the mortgaged property in case of a default by LAP borrower, lenders usually tend to be more lenient with credit scores while reviewing LAP application. As a result, those unable to avail personal loans due to their low credit scores or are being charged higher interest rates due for it can consider availing LAP.
OD for working capital
Many lenders offer LAP with overdraft facility, in addition to the term loan facility, mostly to allow businesses to meet their short-term working capital requirements. Under the overdraft facility, a credit limit is set for the borrower from which the borrowers can withdraw as per their requirements. The interest is charged only on the amount drawn, not on the set limit, and till its repayment. The borrowers are free to make ‘n’ number of withdrawals and repayments as per their financial requirements. This feature makes the LAP overdraft facility an excellent option for businesses.
Potential rent
Many individuals or businesses earn rent from their own commercial spaces by offering them on lease. To monetise such lease rentals, many lenders offer property owners the facility of Lease Rental Discounting (LRD). Under this facility, the loan amount offered to the property owner is based on the potential rent receivables from the property let-out on lease.
Debt consolidation
Improved credit access is leading many people to avail loans for financing their lifestyle. This has left many of them with multiple EMIs, often at high interest rates, leaving very little to spare for investments and financial security. Lower interest rates and longer tenures of LAP make it an excellent option for consolidating multiple loans/credit card facilities into a single loan at lower interest rates and for lower EMIs.
(The author is Head of Home Loans, Paisabazaar)