Beginner’s Guide For Taking A Loan Against Property

Rahul Sharma, who ran a carpet manufacturing business from Bhadohi in UP, recently turned 40 and decided to take stock of his life and business. He noticed that while his business was doing well, the growth rate was beginning to stagnate. Since he had significant domain expertise and useful work experience, he decided it was the right time to scale up his business. With an expansion plan in the works, he started looking for options to raise funds. With a multitude of financing options available in the market, Rahul was confused. 

While, initially, he considered the possibility of taking a personal loan, the high rate of interest became a non-starter. A friend suggested that he explore the option of availing a loan against his property, since it was a popular option for many like Rahul. From giving immediate access to a large sum of money to flexible repayment options, it scored quite well compared to other forms of financing.

The suggestion helped Rahul raise a loan on favourable terms, and also get his expansion plans off the ground. 

If you feel stuck in the same sort of situation like Rahul, and considering taking a loan against your property this article is for you. Read on for a crash course on everything you need to know about loan against property and the ways in which it can benefit your business.

1. What is loan against property?
2. What are the features of loan against property?

3. Why Take a Loan Against Property?

4. How much loan can you get?
5. What can Loan Against Property be used for?
6. Which property types are eligible for Loan Against Property?

7. What are the Documents Required to Apply for LAP?

8. Loan Against Property from Hero FinCorp

What Is Loan Against Property

A loan against property (LAP), also known as a mortgage loan is a secured form of personal loan. The loans are given out against the security of your assets pledged as collateral and can be availed by both self-employed and salaried individuals. 

The collateralised asset can be a residential building, a commercial building, or a combination of both. The loan amount is decided based on the market value of this property and your repayment capability. 

Since the lenders have more security, lenders have less risk and the borrower enjoys a better term compared to its unsecured counterpart. The loans can be taken for funding business expansion plans, meeting children’s education and marriage expenses, among others.

However, in the event of failure to repay the loan, the lender is entitled to sell the pledged assets to recoup the loss incurred.

Features of Loan Against Property?

Some of the key features of loan against property are:

• Simple Eligibility Criteria

As the loans issued are covered by the property of the owner, the eligibility criteria are very simple. Any self-employed and salaried individual with a stable income source and good credit score can apply for the loan. 

• Lower Interest Rate

As the lender undertakes less risk on advancing mortgage loans, the loans have a lower interest rate compared to its unsecured equivalent. This allows easy and quick repayments.

• High Loan Amount and Longer Repayment Tenor

The borrower can avail up to 75% value of the property pledged as collateral and enjoy a flexible and longer repayment tenor. The repayment tenure can be as long as 15 years, which makes repayment instalments affordable.

• Simple Documentation and Quick Processing

The mortgage loans have a simple documentation process with quick turnaround time, provided all eligibility criteria is fulfilled.

LAP application has faster approval rate than home loans as the property already exists and is easier to ascertain the market value.

Why Take a Loan Against Property?

Loan against property offers multiple benefits to borrowers, which makes it a highly recommended loan option for every category of individuals.

Following are the benefits associated with a loan against property:

• Optimum Use of your Property

Loan against property allows you to unlock the hidden value of your property and use it to meet urgent financial requirements.

• Continuous Ownership

In the LAP, you never lose the ownership of the property mortgaged during the loan tenor. As defined under the Transfer of Property Act, 1882, the term mortgage means "transfer of interest" in a specific property for securing an advance by way of loan.

And, for any reason, if you default on the loan, then you have the option to sell the property and settle the loan. Further, you can keep the surplus cash from the sale proceeds and start afresh after the settlement of the loan.

• Pre-Closure Benefits

In LAP, no penalty is charged on prepaying the loan, except if the loan is issued on fixed-interest terms. Therefore, you can reduce your overall interest burden and tenure by repaying a small additional amount regularly.

The benefit is not extended to business or corporate entities.

• Re-Financing

Business owners who are in continuous need of funds to meet business expenses can refinance the loan to increase the loan amount.

The same property can be used multiple times at the latest market valuation for business expansion.

Loans Availed can be Used for Multiple Purposes

Since LAP is a secured form of personal loan, there are no restrictions on the purpose of utilizing the loan amount. The discretion on use of the loan amount completely rests on the borrower with no interference of the lender.

The loan amount can be used for funding education of your children or meeting upcoming marriage expenses or financing business expansion. You can also use LAP for buying a new property or asset, which otherwise does not qualify for a loan.

Tax Benefits of LAP

As LAP comes under the category of personal loans, many borrowers are unaware of the tax benefits. However, the tax benefits depend on the end usage of the loan.

• Under Section 37(1), the interest paid and other costs incurred like processing fee and documentation charges can be claimed as business expenditure

• If the loan amount is used for purchasing house property, the interest paid can be claimed for tax deduction under Section 24(b). The maximum amount of Rs 2 lakh can be claimed in a financial year.

But, there is no tax benefit on the principal repayment of LAP. 

How Much Loan Can You Get?

There are multiple factors based on which the lender decide on the loan amount. Following are the factors which affect the quantum of your loan amount:

• Age of the Applicant

• Employment Status (for salaried class)

• Income of the Applicant ( for both salaried and self-employed)

• Status of Leverage Property ( Documents and Insurance)

• Regularity in Filing of Income Tax Returns

• Credit Score of the Applicant

• Loan Tenure

Depending on all the eligibility factors, the lenders offer up to 50-75% of the property value as a loan. The remaining value of the property is held as margin money. This ensures protection to lenders from real estate price fluctuation that may affect the property valuation.

What Can Loan Against Property Be Used For?

There are no usage restrictions on loan against property by the lender and borrowers are free to decide on the loan proceeds. The loans are generally taken for funding important life goals and among other things. They are:

• For children's higher education

• Wedding

• Meeting medical emergencies

• To purchase a new property

• Foreign Vacation

• To start a new business

• For meeting funding requirements for business expansion

However, the loan proceeds cannot be used for speculative purposes or for illegal activities.

Which Property Types Are Eligible for Loan Against Property?

Under LAP, only self-owned immovable property are eligible for the mortgage. An individual can mortgage the self-occupied residential house , rented residential property, piece of land, commercial property or rented commercial property.

The lender also checks whether the property title document is free from any type of litigation.

What are the Documents Required to Apply for LAP?

Following are the documents required for quick approval of LAP applications:

• Identity Proof (AADHAAR, PAN Card)

• Address Proof (AADHAAR, Electricity Bill)

• Income Proof

• Income Tax Returns (last 3-4 years)

• Property Documents ( Possession Certificate, Registration Documents) 

• Last six months bank statement

• A cheque for processing fee

Also Read: जानिए, प्रॉपर्टी लोन(लोन अगेंस्ट प्रॉपर्टी ) लेने के सरल तरीके

Loan Against Property from Hero FinCorp

Hero FinCorp is the leading and most trusted financial institution of India offering 2 wheeler  loans, LAP, SME & Corporate loans. 

Loan against property is available only for business entities, manufacturers, traders and self-employed professionals. The LAP sanctioned by Hero FinCorp is restricted to following end-uses by business entities:

• Meeting business funding requirement

• Mortgage buyout or balance transfer of existing loan

• And, consolidation of debt

LAP Features

• Offers high Loan to Value ratio of up to 75%

• Loan amount starting from Rs 50 lakh to Rs 15 crore

• Flexible repayment tenure of up to 180 months

• Quick approval and disbursal ( successful processing takes 7 - 10 working days)

Eligible Property Types for LAP

Hero FinCorp offers flexibility in property types and approves loans on almost all self-owned property types. Following are eligible property types:

• Residential Property

• Commercial Property

• Mixed-Use Property (residential and commercial space in same premises)

• Land, Building, Apartment, Factory, Shop etc

• Alternative Assets- Farm House, Vacant Plot, Hotel/Guest House, School/College, Hospital, Industrial Property

Benefits Offered 

Following are the benefits offered on LAP by Hero FinCorp:

• Higher loan approval rate

• Offers competitive interest rate

• Accepts almost all self-owned immovable property

• Long & flexible repayment tenure (60 - 180 months)

• Multiple payback options ( post-dated cheque, electronic clearing system, NACH and online payment)

• Quick & hassle-free approvals

• Offers doorstep service to customers

Eligibility Criteria for LAP

Following conditions should be satisfied to avail loan from Hero FinCorp:

• Loans issued are purely for funding business needs

• Minimum applicant age: 25 years

• Business vintage: 3 years

• Minimum valuation of the property: Rs 50 lakh

• Maximum age of the property (buildings or man-made objects): 50 years 

• The pledged property should be insured from fire and natural calamities during the loan tenor

Documents Required

Following are the documents required by Hero FinCorp to approve LAP applications:

• KYC Documents (AADHAAR, PAN Card)

• Income Proof ( income tax returns, financial statements and projections)

• Company Constitution Proofs & Registration Certificates

• Property Papers ( possession and registration documents)

Conclusion

All the components of a LAP make it an ideal option for financing big expenses for both businesses and individuals. The lower interest rate and flexible repayment feature makes it a win-win proposition for the borrowers.

If you are clear on your business road-map, feasibility and cash-flow projections, then raising funds through LAP is the best choice. It also put your assets on a more productive use.