How Does Loan Against Property Work

One of the most effective ways of raising money is through a Loan Against Property or LAP. Many of us often face difficulties while applying for personal loans, due to high interest rates or shorter tenures, even if we have sufficient assets and net worth.

Thankfully, there is a type of loan that can help you get over this cash crunch and help you sail through the crisis. One particular loan that you should know about in such situations is Loan Against Property, popularly known as a LAP Loan.

Please don’t confuse a Loan Against Property (LAP) with a home loans (which you take to buy a house), LAP is one of the most common and popular financing options available. It is literally what the name suggests, get a loan against your existing property or real estate assets. As these loans are secured loans, they require you to mortgage your property in order to avail funds.

Advantages of Loan Against Property

1. Higher Loan Amount: Since real estate is a high-value asset, the resulting amount is also high. Compared to personal loans, the amount is significantly higher.

2. Low-Interest Rates: Another factor that makes LAP appealing is the low-interest rates. Compared to personal loans, that charge an interest of 16-20%, LAP interest rates are usually very low in the range of 09-12%.

3. Encompassing all Property Types: Yet another reason why LAP is so popular among various applicants is the fact that it includes almost all types of real estate properties, such as residential, industrial, commercial, and vacant land.

4. Long Tenure: As this is a secured loan, the tenure to repay the loan can be longer. Most banks offer 15 years to repay LAP, some might even go up to 25 years with a balance transfer. You also have the option to settle the debt earlier if you need to.

5. Multiple Repayment Options: Loan against property is repaid on a monthly basis through EMI. The payment options include Post Dated Cheques and Electronic Clearance System.

Eligible property types of Loan Against Property

1. Residential, Commercial or Industrial: The three most common types of real estate properties are obviously eligible for LAP. Residential properties are mortgaged most frequently to avail loans, followed by commercial ones. Industrial properties are less common but can be mortgaged if the owner wants to expand the business.

2. Independent House, Building and More: Despite being less common, such properties can be easily mortgaged to avail loan. It includes buildings, apartments, independent house, commercial premise, factory, shop etc.

3. Alternate assets: There are some properties that might be already occupied by you or other users, and/or in existing occupational use. It is rare to find such properties getting mortgaged since they are also a source of income for many, but they are still eligible. Includes vacant plots, schools, colleges, hospitals, industrial land etc.

Applicability of Loan Against Property

It can be used for a variety of scenarios. You can use the funds for any purpose you see fit, like buying new assets, investing in education etc. Here are some particular use cases for loan against property:

1. Business Purposes: Generally, obtaining a loan against property for business purposes is better than a business loan. One of the reasons is flexibility. For instance, if you opt for equipment financing, you can only invest in equipment and machinery. However, by mortgaging your industrial land/factory, you can use the funds in any way you want - be it business expansion, machinery acquisition or project financing.

2. Debt Consolidation: Debt consolidation is a popular practice of replacing multiple, unsecured debts with a single debt at lower interest rates. It simplifies the numbers for you and costs you less. Loan against property is a good way to consolidate debts because of the lower interest rates.

3. Lease Rental Discounting: Many people lease their properties to tenants in return for monthly rent. Lease rental discounting is a way to procure funds, where the loan is repaid by the tenants directly to the lender in the form of rent. LAP is an alternative to LRD due to certain factors. First, the amount is higher compared to LRD, while the interest rates are lower. In case of LRD, you need to have tenants pay regular rent, which is not the case with LAP. Also, the EMI is flexible in case of LAP.

Eligibility and Documentation

In order to be eligible for a loan against property, you need to fulfil following criteria:

1. Be either a self-employed person or a business entity

2. Have a minimum age of 25 years

3. In case of a business entity, the business must be at least 3 years old

4. The property must belong to one of the types eligible for the loan

Following documents are required to apply for LAP:

1. KYC

2. Proof of income (including income tax returns, financial projections, financial statements etc.)

3. Company constitution and registration, in case of business entities.

4. All the documents related to the property being mortgaged

Conclusion

Loan against property is a simple and hassle-free way to acquire funds without much effort. Real estate is one of the most faithful assets, and it only makes sense to use it for getting better financing options. To the uninitiated, mortgaging property (especially residential) might seem a risky option; however, in comparison to other loans and financing options, LAP is safer and more convenient.