Many individuals or business owners own commercial spaces and earn rent by offering them on lease. While leasing such properties has several advantages, Lease Rental Discounting or LRD is a major advantage to raising a loan against the rental income in advance. It is a term loan that property owners may borrow against their income-generating property or commercial assets. The loan works based on the principle that the leased property will derive a fixed rent during the lease period, which the owners can use as collateral to borrow a loan.
In the following sections, we will understand the LRD full form, meaning, working, requirements, benefits, etc.
What is LRD?
LRD’s full form in banking is Lease Rental Discounting. Borrowers take a specific loan type against a property’s rent receivables. Mostly, property owners obtain these loans against their rental receipts for leased contracts. Loan seekers can borrow these loans to cover various expenses, including business expansion, weddings, higher education, property renovation, etc.
Property owners can unlock their property’s financial potential by accessing funds against the rent receivables. It is similar to a loan against property where the loan amount depends on its value. In an LRD, the loan amount depends on the rental income a property is expected to generate.
Read Also: Difference Between Finance Lease Vs Operating Lease
How Does LRD (Lease Rental Discounting) Work?
When property owners rent out their assets, they enter into a lease agreement with the tenant. In the agreement, the tenant agrees to pay a specific monthly rent to the property owner for a fixed period. That means the property owner can calculate the total rental income they will receive during the lease period. They can take a loan against this rental income in advance if they need money now. Therefore, they apply for an LRD loan against the rental income they expect to receive.
Features of Lease Rental Discounting
After understanding the LRD full form and meaning, it’s time to look at the features of this funding option:
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Purpose: One may avail of LRD for property renovation, acquisition, debt consolidation, business expansion, etc.
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Loan Amount: Depending on the policies, the borrower can get up to 80% of the total rent they expect to receive.
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Interest Rate: The LRD interest rate varies for each borrower based on their income, credibility, DTI ratio, repayment capacity, etc.
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Repayment Term: Since the loan size can be larger, the repayment terms are also longer for LRD loans.
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Applicable Charges: LRD loan seekers must be ready to pay a few additional charges, including processing fees, foreclosure charges, penal interest, NOC/NDC charges, etc.
Benefits of Lease Rental Discounting
Lease Rental Discounting is a beneficial funding option for property owners who want to leverage their property’s value without selling it out. Here are a few benefits of an LRD loan:
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Easy Access to Funds: LRD full form suggests that property owners can monetise their rental income to access funds quickly. With an LRD loan, the property owner can borrow a loan against the rental income they expect to receive.
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Reasonable Interest Rates: Since LRD is a secured loan, its interest rates are usually lower than an unsecured loan, making it cheaper than other financing options available in the market.
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Longer Repayment Terms: A longer-term that LRD loans provide gives borrowers more time to repay their loan in smaller instalments.
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Usage Flexibility: Property owners can use LRD funds for various purposes like business expansion, new property acquisition, property renovation, etc.
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Tax benefits: The interest paid on an LRD loan offers tax benefits.
Eligibility Criteria of LRD Loan
The applicant must fulfil the following eligibility conditions to obtain a lease rental discounting loan:
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At least 18 years of age at the time of loan application and most 65 years at loan term-end
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Indian resident citizen
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Own properties in urban, semi-urban, or urban areas
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Rented properties to government or semi-government bodies, public sector undertakings, multinational companies, financial institutions, banks, reputed corporations, etc.
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Loan security is chargeable through an equitable property mortgage to be financed or any other collateral as required by the loan provider.
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Any other interim or additional security if the lender demands
Documents Required for LRD Loan
Here is a standard list of documents required for a lease rental discounting loan:
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Duly filled application form
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Recent passport-size photograph
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Identity proof, like an Aadhaar card, voter ID card, driving license, PAN card, etc.
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Age proof, like a passport or PAN card
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Address proof, like passport, utility bill, driving license, etc.
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Income proof, like bank statements, ITR, Profit and loss Account, Balance Sheets, etc.
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Property documents, like title documents, lease agreements, approved plans, sale deeds, valuation, and Title Search Reports.
EMI vs Rental Payments: Which is Better for LRD Loans?
Most loan types require the borrowers to repay the borrowed amount in EMIs. However, in an LRD loan, the borrowers must repay the loan through the monthly rent they receive for the property. This repayment arrangement saves the borrowers from paying any EMIs, and the repayment will be automatically made from the property rent. Calculating the loan EMIs becomes easy with an online mortgage loan calculator.
LRD Loans vs. Traditional Loans in India
LRD loan is a specific loan type specifically designed for property owners receiving rental income on their properties. In India, lending institutions offer traditional loans based on the borrower’s income, collateral, and creditworthiness. On the other hand, they offer LRD loans based on the rental income that the property generates. The loan amount for lease rental discounting depends on the property’s value and rental income.
The repayment of an LRD credit is also different from that of a traditional loan. Compared to conventional loans, LRD loans have longer repayment terms, and the lender deducts the repayment from the property's rental income. Another important difference lies in the loan's eligibility criteria. Financing companies often offer these loans to individuals with commercial properties generating rental income. Conversely, people can use traditional loans for various purposes, such as Personal Loans, Home Loans, SME loans, etc.
Lease rental discounting meaning suggests that LRD is an attractive funding option for people who own a property and earn rental income from it. Unlike traditional loans, LRD loans can help meet the unique funding needs of the owners.
Conclusion
Leveraging rental income through Lease Rental Discounting is a lucrative funding option for those who receive rent on their property. Whether individuals or small business owners, LRD loans offer several advantages, like low-interest rates, larger loan amounts, flexible repayment terms, etc. To ensure financial success and security, it's important to understand the LRD full form and meaning and leverage the funding option to make the most out of a property.
Frequently Asked Questions
1. What is the maximum LRD loan amount available for borrowing?
The maximum loan amount depends on the property’s rental income. Usually, one may borrow up to 80% of their property’s rental income.
2. What are the eligibility conditions for LRD loans?
The loan seeker must fulfil the eligibility criteria related to the borrower’s age, rental income, credit history, etc., to obtain lease rental discounting.
3. Are LRD loans available for residential properties?
No, LRD loans are mostly available for rent-generating commercial properties like offices, warehouses, etc.
