LOAN AGAINST PROPERTY - A READY GUIDE.

Posted by Anurag Mishra on March 31st, 2017

Taking a loan against property often comes with questions and apprehensions. It also comes with bigger benefits than a regular personal loan. So how do you decide if it is for you? Have a look at our detailed guide below to know how loans against property work and how you can get one.

So what is a Loan Against Property (LAP)?

A loan against property is a type of loan that is available when you mortgage a residential or commercial property of your own. While other types of loans require guarantors to vouch for the applicants, an existing property in this case acts as a primary security to avail the loan.

When a property is pledged, the lender first gauges its current market value independently. They do this by sending an appraiser for evaluation who also considers other factors like age of the property. Once they arrive at a value, the loan amount is derived from certain fixed percentage of the property's market value. The key criterion, of course, is that the property should not have been used as a security for any other purpose. It is one of the cheapest retail loans after home loans.

Some of the most common reasons to get a loan against property are for business expansion or bridging capital expenses. In either case, you can pledge your property to borrow a lump sum amount that can be repaid in equated monthly installments (EMIs). The other option is to take the loan as an overdraft account which will allow you to withdraw more than your available bank balance and you pay interest only on the amount withdrawn.  If your business has a sudden requirement, a loan against property can be super quick to process.

Needless to say, capitalizing your existing assets without actually selling them comes with its fair share of benefits and risks. One of the key concerns is the magnitude of documentation involved, is it more or less than a regular loan. A second concern is parting with the original papers of your existing property. Most people believe that the valuation process may be long as the lender may need more time to arrive at an estimated price of your property. In reality, if your base documents are in order, the process will actually take as much or even lesser time than a regular loan. Lenders tend to understand how pressed you are for time and use an array of resources to close the process as fast as possible.

Another common concern wraps around a lower loan to value ratio. Most people consider the property you currently live in as a "notional" asset as you really cannot sell it unless you want to move into a rented home. But the value of this notional asset comes into play if it is pledged for a loan. Real estate market prices can fluctuate quite a bit so it is common to have this worry if you are taking a loan against property during a lean period. However, most lenders work around this as much as possible to give you the highest possible loan amount with most providing between 40% - 60% and some providing up to 80% of the property value.

A higher rate of interest also is a common area of concern. This concern is usually negated by expert lenders who provide flexible tenure options against the loan which lets you decide the amount of interest being paid over a period of time. Few lenders like Hero FinCorp also uphold transparency as a key to their business and handhold you every step of the way to ensure you know exactly how much the loan will cost you in the long run.

Why take a loan against property? What benefits does it have over a regular loan?

Loan against properties is usually taken to serve professional purposes. It can be used to expand your business, consolidate your high priced debt into a single low priced loan, upgrade your factory, fund purchase of new plant and machinery or acquire other businesses.

Let's say that you are running an educational institution and are looking to expand with new business centers in different areas in the city. You may pit a regular business loan and a loan against property to know what works better for you. You are essentially looking for a loan that can stretch itself to the maximum and give you time and flexibility for repayment as your business picks up in the new location. Let's lay out the benefits.

First things first, with a loan against property, you get a higher loan amount with a lower EMI. In a personal loan, your loan amount is capped by your income capacity, limiting your options while in a loan against property, if you have a high net worth asset, your loan amount can increase significantly.

Because the security is provided in terms of a property, this will also mean lower interest rates. The interest rates typically range from 13%-15%. A personal loan, on the other hand, can have interest rates between 14% and 24%. This means that you will be able to reduce your credit expense by utilizing your existing assets.

The second benefit is definitely the loan tenure. After home loans, loans against property allow return tenure of more than a decade with a maximum period of 15 years. You only get a maximum of 5 year return period for a personal loan. It also works as an excellent debt consolidation tool for those who already have an existing higher ROI loans.

One hidden benefit that works well is that you can use a refinance option during the loan tenure if the property value increases, which works great if you plan to expand your business periodically.

Having said this, one must also be aware of the all aspects of taking a loan against property like:

1.      In most cases, banks do not provide over 60% of the property value as a loan or over 50% in the case of commercial properties. In such cases, a non-bank lender like Hero FinCorp is a great option. They not only offer higher amount of loans but often offer a better loan rate for your property as well.

2.      You may be charged a processing fee between 0.5% - 1% depending on the terms the lenders extend

3.      It goes without saying that this loan is best when you have a well chalked out plan on your repaying abilities. The consequences of not paying the loan can result in the obvious loss of property. 

4.      If you're a salaried individual, you won't get a tax rebate for this loan. But if you have a business and you can prove that the loan was taken to improve your venture then, you can claim a tax deduction on the interest amount.

5.      If you are a business owner, some financial institutions can increase your eligibility limit by offering turnover surrogate schemes. Make an inquiry about this when you apply.

6.      You can also increase your eligibility amount by applying with multiple properties like residential and commercial properties, residential plots, farmhouses, industrial property, hotels, guest houses, nursing homes, hospitals etc.

If you've weighed all the pros and cons and think this will be a good option, here's how you can check your eligibility criteria and get your documentation in order.

Loan against property can be availed by self employed businessmen, manufacturers, retailers, traders and service providers, although there are restrictions for startups. Loan can be availed by proprietorships, partnerships, Public & Pvt. Ltd Companies. Business like those for auto components, auto manufacturing companies, educational institutions, schools, colleges and service sectors are some of the prime beneficiaries of this loan. You should be between 21 and 65 years and have a good credit score too.

You'll be required to produce identification documents like PAN, voter's id, passport, electricity or telephone bill, financial statement in case you are self employed and income statement for the last three years if you are salaried.

Details about the Application Process

You'll need to start by choosing a financial institution. Check out reviews of those who have great customer service and enjoy a good reputation in the market. While word of mouth is a good bet, players like Hero Fincorp which provide a great value for service during the loan tenure will be a good lender to go with. The overall process may take as few as five business days - where your assigned relationship manager examines your documents and eligibility criteria on day 1, you submit your documents and wait for a total of 3 days for financial appraisal and finally on day 5 your loan may be sanctioned!

Other important things to know

In order to reduce your debt obligation, you may want to do a balance transfer of your loan. This entails moving your loan to an institution which provides a lower interest rate and resultantly helps you save on EMIs or a shorter tenure. To do this, the entire unpaid principle amount will have to be paid back to the original lender and you will continue to pay the remaining EMIs at a new rate to your new lender. This does involve a bit of paperwork but it can be worth the savings in the long run.

{Source: https://www.herofincorp.com/blog/loans-against-property---a-ready-guide}