Need money to start a business? Is THIS your best loan option?
Loan against your property is the best loan for a large cash requirement and a long tenure.
Sameera Goyal, a single mom wanted to help her daughter with funds for her business. While Sameera has a regular income source which was more than enough for her needs and luxuries, she did not have the lump sum of Rs 15 lakh that her daughter required.
After exploring various options she thought of taking a loan against her residential property. For her loan against property was the best choice among various options presented to her.
Important facts about loan against property (LAP)
- Minimum amount of loan disbursed can vary from bank to bank and from Rs 2 lakh to Rs 30 lakh
- The property has to be insured before the loan is disbursed
- A no objection certificate (NOC) from the housing society where the property is situated is required
- Though the rate of interest is quite reasonable, there are several charges associated with loan against property. These include, processing charges, valuation charges and there is usually a hefty pre-payment penalty too
- The usually tenure for LAP is 5 to 15 years. Hence the loan may be unsuitable if you need the funds for a short period
- For a self-employed person applying for LAP, the business needs to have been in existence for at least 3 years. This loan is not available for new companies
- The property needs to be free from encumbrances i.e. there should not be any lien on the property. A certificate to the effect is required
How much loan can you be granted?
Most banks will give a maximum loan of 50 to 60 per cent of the property value. If your property is valued at Rs 2 crore, you could get a loan of up to Rs 1 to Rs 1.2 crore. However each bank appoints its own valuer who inspects and values the property on the basis of which the loan is given.
Even if a larger amount of loan is available to you, it is advisable to take only the loan amount for which the monthly EMIs can be paid comfortably as you are in danger of losing the asset in case of default.
A lot of advantages
- LAP is fairly easy to procure because the documentation is straight forward as the borrower already owns the property
- Interest rates are far more attractive than other forms of loans, like personal loans. The rates would be 1 to 3 per cent higher than home loan rates
- The property continues to be in the name of the owner and the asset can be put to productive use
- It is the best loan for a large cash requirement and a long tenure
The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.
Photographs: Rediff Archives