Loan against property (LAP) is a type of loan facility availed by individuals and businesses against the mortgage of a commercial or residential property. It is a secured loan, where the borrower pledges the property as collateral against the loan amount.
Once the documentation required by the lender is completed, a borrower can have as much as 70% of the property’s value. Depending on the lender’s policy, a borrower can repay the loan in a more extended period. Before you try out this loan scheme, you need to know everything about the factors that affect the interest rates, process, and schemes, as well as the advantages and drawbacks.
Understanding Loan Against Property
LAP is a secured loan taken against an individual’s property. It is a loan offered by banks or non-banking financial companies (NBFCs). This loan is generally taken out for large expenses such as home renovations, business expansions, or investments. It is a popular form of mortgage loan available in India.
LAP is a great option for people who require a large amount of money but need more assets to pledge as collateral. It can also benefit those looking for financial stability who want to consolidate their debts into one loan.
However, it is important to remember that if the borrower cannot repay the loan, the lender can take possession of the property and auction it to recover the loan amount. Therefore, it is important to borrow only what is required and make sure that the borrower can repay the loan as per the terms and conditions.
Factors That Affect Interest Rates
Interest rates are important when taking out a loan, particularly a LAP. The interest rate you receive on your loan will determine the overall cost and how much you will end up paying back throughout the loan.
Credit Score
Lenders will use your credit score to assess your creditworthiness and decide whether or not to offer you a loan.
A low credit score suggests that you are a high-risk borrower and may have difficulty repaying the loan. As a result, lenders may charge a higher interest rate on a LAP to offset the risk of default. It may also have a stricter approval criterion.
Profile of the Applicant
The applicant’s profile may include income, age, and previous loans.
Your income is another important factor in determining your interest rate. The higher your income, the more likely you will be able to afford the loan and make timely payments. As a result, lenders are more likely to offer you a lower interest rate.
The borrower’s age is important, as lenders generally prefer older borrowers with established credit histories. For younger borrowers, lenders may consider their loan application as more of a risk. It is because younger borrowers often have shorter credit histories and, as a result, may have lower credit scores than older people.
Lenders also consider your existing loan history. The lender will likely offer you a low-interest rate if you have a good repayment record. It is because you have demonstrated your financial responsibility in the past. If you have multiple existing loans, the lender will be reluctant to provide you with a higher loan amount as the risk of defaulting on the loan is high.
Property Value, Documentation and Insurance
The appraised value of your property will also play a role in determining your interest rate. The higher the appraised value of your property, the more likely you will receive a lower interest rate.
The documents that you have provided serve as evidence of the ownership and value of the property being used as collateral. The more information provided to the lender, the more accurate the assessment of the loan’s risk can be.
Adequate insurance coverage is important to ensure the safety of the lender’s investment. The lender must be sure the collateral property is protected in case of any eventuality. The lender needs to be satisfied with the property’s insurance. In case of any damage, the insurance should be able to cover the cost of repair or replacement.
Loan Amount and Tenure
The amount you borrow will also play a role in determining your interest rate. It affects the repayment capacity of the borrower. The higher the loan amount, the higher the monthly installments, which might be difficult for the borrower to pay. In such cases, the lender will charge a higher interest rate to compensate for the risk associated with the loan.
The longer the loan tenure, the higher the risk to the lender. Thus, the higher the interest rate. It is because, over a more extended period, the risk of default increases, and lenders need to compensate for this risk by charging a higher interest rate.
Applying for Loan Against Property
Understanding the eligibility criteria, documentary requirements, and the process is important to help you understand the loan details before signing the LAP agreement.
Eligibility
To be eligible for a Loan Against Property, you must:
- Have the collateral property in India
- Must be 25 to 65 years of age
- Must have a steady income from a job or a business with a minimum of Rs 25,000 a month
- Secure the complete and legal property documents
Once you have confirmed that you meet the eligibility criteria, you can apply for a LAP. The lender will assess your creditworthiness and the property’s market value before approving or rejecting your application.
Documents Needed
The documentary requirements for a LAP application are essential to ensure that the loan is taken out per the lender’s regulations and that the lender and borrower are both protected. Here are the required documents when you apply for a LAP:
- Proof of Identity (passport, driver’s license, and other government-issued IDs)
- Proof of Address (recent utility bill, property deed, or rental agreement for commercial property)
- Property Documents (deed of sale, no objection certificate, and property tax receipts)
- Proof of Income (salary slips for the past three months, bank statements, and income tax returns)
Application Process
The first step in the LAP application process is determining eligibility. Generally, lenders will require you to have a steady source of income, a good credit score, and a valid property title. You may also need to provide additional documents such as bank statements, financial records, and proof of income.
Once you have determined that you are eligible, you must choose a lender. Different lenders may offer different terms, so it is important to compare offers and choose the one that best suits your needs.
You will need to complete the application form provided by the lender. This form contains all the necessary information about you and your loan request.
The lender will decide whether or not to approve your loan based on your eligibility, documents, and provided information. If your loan is approved, the lender will send you a loan agreement outlining the loan’s terms and conditions.
Features and Benefits of Loan Against Property
Low-interest Rates
Under LAP, lenders can secure the property collateral. The risk is much lower for them. It allows them to offer lower interest rates, making it an attractive option for borrowers.
Flexible Repayment Options
Most lenders offer flexible repayment options, allowing borrowers to choose the most suitable repayment option for their needs. It could include shorter or longer repayment periods, fixed or variable interest rates, and more.
Tax Benefits
Interest payments on a LAP can be deducted from your taxable income. It can reduce your tax liability and provide additional savings.
High Loan Amounts
Loan amounts are typically higher with a LAP than with other types of loans. Since LAPs are secured loans, they tend to have higher loan amounts than unsecured loans. They have more confidence in providing the loan. The LAP can benefit those looking to borrow a large sum of money.
Flexible End-use
LAP can be used for multiple purposes, such as home renovation, debt consolidation, business expansion, and more. This makes it a great option to fund a variety of needs.
