What is Loan Against Property
Loan Against Property (LAP) is a secured loan that is disbursed against the mortgage of any property. The property itself must be free from encumbrances. The loan amount is decided on the market value of the property and usually varies between 40% and 60% of the same. The end use of the money received from this type of loan may be multifarious. The amount may be invested in business, property, social events like marriage, children’s education or any such priority. The repayment term ranges between 5 to 15 years. At the end of the tenure, if the borrower is unable to repay the loan amount, the disbursing financial institution has the right to take possession of the mortgaged property.
Uses of Loan Against Property
The loan amount may be used for the following purposes
- Investment in business by individuals or private companies.
- Personal uses like financing education, a vacation, marriage etc.
- Acquiring a new property.
- Emergency purposes like medical treatments.
Advantages and Disadvantages of LAP
LAP comes with a bunch of benefits that make this type of loan highly desirable.
- It comes cheaper when compared to other types of loans.
- The processing of the LAP is faster compared to a housing loan, as in the former case the property is already in existence.
- The interest rates are also higher.
- Even after mortgaging, the property continues to be in the name of the owner.
- Since the loan amount is based on the asset value, there is a possibility of increase in the loan amount if the market value of the asset rises.
- There is a provision of partial pre- closure without involving penalties.
- LAP provides an opportunity to refinance i.e. a businessman can get an increased / additional quantum of loan, if the business is steadily expanding, as well as, if the business has the potential for future expansion.
- In case the borrower realizes his/her inability to repay the loan, he/she may sell the property and make the necessary pay-back of the loan amount
- No additional guarantee is required.
- Even if a property is in the name of an individual, loan against it can be taken in the name of the firm.
Disadvantages of LAP
- New businesses cannot apply for LAP. They must be in existence for a minimum of 3 years to be eligible. For individuals, their minimum employment period must be 1 year.
- Loan is not sanctioned beyond 60% of the value of a house and 50% of the value of a commercial property.
- There may be a processing charge of 0.5% to 1%.
Both salaried and self-employed individuals (professionals/businessmen) can apply for loan against property. Some criteria which need to be met are:
- Applicant must have a property in his/her name.
- The loan can be applied to a collateral property.
- The property should be free from encumbrances.
These must accompany the completed loan application form.
Following is a checklist of the documents normally required:
|DOCUMENTS||SALARIED APPLICANT||SELF EMPLOYED PROFESSIONAL||SELF EMPLOYED BUSINESSMAN|
|Photograph (passport size, colour)||Y||Y||Y|
|Identity (Passport, PAN card, VID, DL)and Proof of Residence (Ration card, Utility Bill)||Y||Y||Y|
|Proof of Business||N||Y||Y|
|Bank Statement (last 6 months/ 1 year)||Y||Y||Y|
|Profit and Loss A/c & Balance sheet and ITR (last 3 yrs, both)||N||Y||Y|
|Processing Fee Cheque||Y||Y||Y|
Documents related to the Property (source: Myloancare)
|DOCUMENTS||SALARIED APPLICANT||SELF EMPLOYED APPLICANT|
|Registered Sale Deed/ Lease Deed||Y||Y|
|Past Sale Deed Chain||Y||Y|
|House tax Return/ Receipt||Y||Y|
|Approved Building Plan||As Applicable||As applicable/td>|
|LOAN AGAINST PROPERTY||PERSONAL LOAN|
|Loan is taken by mortgaging a property||Loan may be taken without any security or guarantor.|
|Interest rates are generally lowest after home loans, thus EMIs also turn out cheaper||Interest rates are on the higher side, with comparatively higher EMIs|
|Loan eligibility is dependent on the value of the property and income of the applicant||Loan eligibility is primarily dependent on the applicant’s income|
|Maximum loan tenure is up to 15 years||Maximum loan tenure is up to 5 years|
|It’s a secured loan||It is an unsecured loan|