Loan Against Property (LAP) or Home Equity Loans, as the name suggests is simply a loan given against the mortgage of a pre-owned property. This is an un-monitored loan, wherein the loan is disbursed in the name of the borrower and the end-usage is not monitored by the lender. A borrower can leverage on his existing property and unlock the hidden market value of the property one already owns. Simply put, Loan Against Property is a secured personal loan and the money can be used for any legal purpose viz. To fund business expansion, child education, marriage expenses and so on.
Features at a Glance:
Maximum Loan – Lenders can fund upto 70% of the current market value of the property irrespective of the registered cost
Maximum Term – Terms can stretch upto 15 years depending on borrower profile and Bank policies
Property Type – Property can be residential or commercial or industrial or even vacant plot in some cases
Usage of a loan against property can be left to one’s imagination and requirements as follows:
- Funding a business expansion
- General working capital requirements
- Funding a one-time investment / expenditure requirement like buying a heavy Machinery or property
- Marriage expenditure
- Child education
- Medical expenses
- Funding your dream vacation
LAP however cannot be taken for speculation or any illegal purpose
Advantages of taking a LAP over a Bank CC Limit:
Loan Against Property
|Bank CC Limit|
|End-usage is not monitored or checked and funds can be utilized for any legal purpose||End-usage should be strictly for working capital needs|
|Documentation requirement is easier, lesser and one-time at the time of loan application only. No documentation are usually asked after loan disbursement||Documentation is more tedious and cumbersome at the time of application. Moreover, the borrower needs to furnish stock statements, financial statements periodically to keep alive the CC limit|
|Interest rates and other charges are more competitive and attractive||Interest rate and account maintenance charges are higher and more expensive|
|Fixed Term loan, resulting in the principal getting paid-off over the years||In CC limit, the limit to the extent utilized remains outstanding always. The Debt never gets paid-off|
Advantages of taking a LAP over a Personal Loan:
|Loan Against Property||Personal Loan / Business Loan|
|Interest Rates and other charges are far lesser and attractive||One of most expensive means to raise a loan with interest rates of 16% and above|
|Longer Loan Terms upto 15 years in some cases||Terms are restricted to 5 years at the most|
|Lesser EMI burden per month||Heavy EMI burden due shorter terms|
|Higher Loan eligibility due to lesser EMIs and longer terms||Loan eligibility is restricted due to higher EMIs and bank policies|
|Maximum Loan amount is virtually un-restricted and depending on the valuation of the property, can go upto 100 Crores||Most lenders usually restrict Loan amount to 25 lacs per borrower due to the obvious risks attached to an unsecured loan|
In a nutshell, LAP is a secured multi-purpose loan with longer terms, lower EMIs and lesser Interest rate….
LAP is usually offered at a Floating Rate of interest, linked to the Bank’s Base Rate or PLR as the case may be. Rate of interest are usually 2-4% higher as compared to a Home loan
Charges in LAP:
In addition to interest rates, one must also consider other charges & fee accompanying at various stages of taking a LAP. Following is the detailed fee structure incurred by Banks at different loan stages:
Processing Charge: It is a fee payable at the time of loan application and to get the loan sanction letter. The fee ranges between 0.5% to 1% of the loan amount
Prepayment Penalties: When the borrower pre-pays the loan before the loan tenure, Banks charge a penalty which usually varies between 2% to 3% of the pre-paid amount. Thought Part-prepayment by the borrower (to a certain extent) does not attract any charges
Legal Charges: Banks also incur some charges from the customer for legal and technical verification of the property
Delayed payment Charges: When there is a delay in the payment of your EMI, Banks charge a late payment fee from the borrower which normally ranges from 2% to 3% of the EMI
Cheque bounce charges: Banks charge between Rs. 250 and Rs. 500 for every bounced cheque towards the loan payment because of lack of funds in your account.
LAP eligibility depends up on various factors. A few of them are listed below -
Income – Your income determines the amount of loan you are eligible for. Banks generally keep the EMI to income ratio at 45% to 60%
Tenure of the loan – The longer tenure you opt for, the more loan you are eligible for
Interest rate offered – If your interest rates are on a lower side, then the loan eligiblity will be higer and vice versa
Existing loans – In case you have any existing loans, then the loan eligiblity amount will come down to keep the EMI to income ratio at 45% to 60%
Credit History – Banks also checks credit history of a borrower from CIBIL (Credit Information Bureau India Ltd.). CIBIL is India’s first credit information bureau, it is a repository of information, which contains the credit history of commercial and consumer borrowers. CIBIL provides this information to its Members in the form of credit information reports. Individuals can also access their own credit reports from CIBIL.
Tax Benefits in LAP:
Interest and other charges paid towards a LAP is a usual business expenditure and is allowed as a deduction from the borrower’s business income while filing his Income tax returns.
Generally the documents required to processing your loan application are almost similar across all the banks; however they may differ with various banks depending upon specific requirement etc.