Loans against property (LAP) are also commonly known as mortgage loans.
It’s a type of loan where a property is mortgaged to acquire a loan. If one needs money to meet one’s short term requirements, one can opt for a LAP because it’s cheaper than personal loan.
To begin with, personal loan interest rates are in the range of 12-25 per cent. This is generally on a daily or a monthly reducing balance method. The rate at which a LAP is issued falls in the range of 12.50 %-15.75 %. The prime reason why the LAP is cheaper than the personal loan is because it’s a secured loan, where the property is the security.
LAP can be used to start or expand an existing business, plan a dream wedding, sponsor a child’s education. However, one needs to give a declaration stating that these funds will not be used to carry out any illegal activities or speculation. The loan is given as a certain percentage of the property’s market value (usually around 40 per cent- 65 per cent). But the threshold amount is generally defined by most lending institutions. Usually, banks and other lenders extend a loan against property as a security, for up to 50 per cent of the market-value of the property. However, the extent of the loan is also subject to your eligibility as per income norms (which are stricter than, say, home loan norms), bearing that in mind there are a few banks who could lend more than the decided threshold amount if a person is a high value customer.
The LAP is usually available on floating interest rates. This type of loan is typically available against residential property, although one may acquire this against commercial property also.
The eligibility criteria to avail this loan are similar to that of a home loan. LAP can either be taken as an overdraft. The advantage of taking a loan using the overdraft option is that you have to pay interest only on the money you withdraw, till the time you repay it. If you opt for a normal loan you will have to pay the interest on the entire amount throughout the tenure of the loan. You must know that not all banks offer the overdraft facility; hence weight your pros and cons before approaching the lender.
Most banks don’t require guarantors. If at all they consider a guarantor, the deciding factor is his/her net worth.
There are processing fees and prepayment charges levied by lenders, but the percentage charged in LAP is comparatively lesser than that in home loans.
Processing fees is the amount charged by banks to cover the cost of processing your loan application. It is usually between 0.25%-2%. Processing fees differ from one bank to the other.
The pre-payment fee is the penalty paid by the borrower for foreclosing the loan before the actual tenure. Pre-payment fees are levied as a percentage of the outstanding principal of the loan amount, it’s not levied by all banks, hence one needs to check the banks that do not before applying for LAP. The charges are anything between 1-4 percent of the outstanding loan amount. There are also charges for converting your interest rates from fixed to floating and floating to fixed that again are options offered by some banks.
Here are a few things you need to keep in mind before approaching lenders for a loan against property:
- Minimum income criteria
- Age eligibility
- Tenure for which loan is granted
- Interest rates offered by various banks in the market, whether fixed or floating
- Whether overdraft is available
- Guarantor needed
- Fees and charges (prepayment facility)
- Documentation
Once you are clear about these few things, acquiring the loan becomes much easier.
The author is a Research Analyst working at Apnaloan.com Services (P) Limited.
June 2nd, 2008 at 11:04 am
It is a great article in the sense that one can take a Loan against Property and not go in to take a personal loan. But don’t you think it will be tough for me when I am unable to repay back the loan. In that case the bank will sell off my property and if I have put my primary residence as mortagage then I will will homeless. In case of personal loan I will be marked as a defaulter but atleast I will not be homeless.
Whats your take on this..
June 2nd, 2008 at 4:36 pm
This has been articulated really well.
This gives me complete comprehensive information about rate of interest (ranging from 12.5% to 15.75&), how much loan can one get, How much loan and what % of market value of ones property does he/she get loan, Foreclosure charges, Processing fees, etc.
It has all relevant data required if someone’s planning to take this up.
Overall Great Stuff
June 2nd, 2008 at 5:29 pm
Great Stuff…gives a complete overview on the loan against property…had always been struggling to get complete details on this topic..now, i seem to be extremely clear on ROI, laon amount, processign charges etc..and moreover the advantage of taking LAP over personal loan…has complete details from all aspect…great..cheers..!!!
June 2nd, 2008 at 5:42 pm
Financial Market in India is still at the growing stage and LAP is a product of Mature market where market is exposed to the different financial products. But in India Prople still dont want to mortgage there property for any small finanacial requirements. “Girwi” is still a taboo in India.
June 2nd, 2008 at 6:02 pm
Great work, you know wat i dont have any loan on me cos i get worried when it comes to loan from bank, thanks to you for imparting your knowledge and it certainly gives a crystal clear info about roi, processes, check list to keep in mind when approaching lenders.I mean now if anyone has a query on LAP then yes i m at their service,thanks to you.
Good work
Stay Up! Take good care of yourself.
June 22nd, 2008 at 9:17 pm
hi vinita,
well, i must say ..good article…on LAP…but dont you think…comparing personal loan with LAP can be a RISKIER option for middle class individual.
as you have mentioned LAP can be taken for a short term requirement…but i dont agree to it. i think personal loan is quite a safe option.
Even personal loan can be taken for the example’s you have mentioned above..so why LAP?
LAP can be used only if an individual wants to expand his huge business or say to repay huge amount of loan..or etc…
i agree LAP is a quick process & even interest rates are cheap …but not an good option..here the risk of loosing your security is quite high incase of non-repayment.
For your information GUARANTOR is compulsory (a guarantor deed)is signed.
As mentioned by Sharad Gandhi above…loan upto 60% of Residential Property and 50% of Commercial property..is given.
overall Good article…
Regards,
June 23rd, 2008 at 7:14 pm
Hi i really appreciate your comments however do not agree to the fact that guarantors are compulsory if you read what i wrote it says Most banks don’t require guarantors. If at all they consider a guarantor, the deciding factor is his/her net worth.
I have spoken to many banks on that front and hence found out that not most banks require guarantors eg., ICICI Bank,Catholic Syrian, Andhra Bank, Bank of Baroda requires if the amt is above Rs.10 lac, IDBI Bank dont require guarantor.
I also agree your views on peronal loan is not better than LAP, however i presented that as an option becoz of the interest rates are lower here and in neither case would anyone like to default whether at the cost of losing a house or otherwise.
June 23rd, 2008 at 7:36 pm
Hi Abhishek
Thanks for your comeents.
There is a definate fear of losing a house if one defaults to repay, however in personal loan one may become a defaulter.If a person goes for LAP he certainly will have fearof losing a house if defaulted however will end up paying the amount, they definately will have to weigh their pros and cons before entering into such treaty, and a person who is a defaulter in personal loan goes scott free, says who? there are repercussion to that as well.
October 13th, 2008 at 7:05 pm
Hi Vinita,
It was very informative article on LAP. But I find you confused in your stand, which is better PL or LAP? In your article you were favoring LAP but in your reply to Forum you said you agree to her that PL is better than LAP.
I would say LAP is anytime better than PL because of the easy availability and low interest rates, when I am saying this; I am saying with reference to the borrower who is taking loan for some legal purpose and have intensions to repay it on time. Your property is very much safe if you pay your EMI’s on time.
It will not be good option if you planning to default.
October 28th, 2008 at 4:23 pm
The article about LAP is indeeed informative, However a minor correction being that, guarantors come into picture only when the lending institution is not convinced about the creditworthiness of a borrower, and holds doubts about his repayment capacity. Bringing in a guarontor makes him a party to the loan, and he is equally responsible for the loan to be repaid in accordance with the set terms.
November 19th, 2008 at 6:59 pm
I wanted to know whether loan against property is eligible for tax deduction benefits?
November 20th, 2008 at 5:19 am
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