LoanRaja Blog- Personal Finance Guide

If you own a valuable asset in the form of a self-occupied house or a commercial property you can unlock its value by going in for a loan against property. Earlier mainly an option of self-employed individuals, Loans Against Property (LAP) is gaining acceptance among the salaried class also as a means to tide over cash crunch. LAP gives you access to finance on the basis of the property that you hold. It is a secured multi-purpose loan with longer tenure and lesser rate of interest than a personal loan. Banks are now promoting LAP as an effective credit instrument to meet your needs like expansion of business, wedding expenses or education.

Features & benefits

The criterion for applying for LAP is that it should be a freehold and self-owned property, having a clear and marketable title. The loan is given as a certain percentage of the property’s market value (around 40 - 60 per cent). With real estate prices on the ascent, entrepreneurs are exploiting the benefits of taking such a loan to meet their need for low-cost funds for investment. Returns on business are higher than the cost of a loan against property. Loans against property are 30-40 % cheaper than personal loans. LAP will have a longer tenure than a personal loan, usually a maximum of 10 years. But a few banks allow tenure up to 15 years. Repayment is through EMIs.

A significant feature of LAP is that one can avail the loan even while a home loan exists against the property. However, the loan eligibility will depend entirely on your repayment capacity. The loan amount sanctioned may range from Rs.25,000 to Rs.1 cr. Normally the lender won’t bother about the end use of the loan. But some banks like SBI want the borrowers of amounts exceeding Rs.25 lakh to give an undertaking that the loan won’t be used for any purpose other than agreed upon. Banks also allow overdraft in place of loan. The customer is charged interest only for the amount that he withdraws from the account.

Eligibility & documents

Lenders want to make sure about the value of the property and your repaying capacity. The loan amount is usually 24 times the net monthly income of salaried persons and for others twice the net annual income as per latest IT return less taxes payable. LAP is also subject to the minimum market value of the property. Norms vary from bank to bank. But generally the following are the eligibility norms: An employee who has a monthly net salary of at least Rs.12,000. A self-employed person or an income tax assessee with a net annual income of Rs.1.5 lakh. The income of the spouse may be added if he/she is a co-borrower or a guarantor. Maximum age limit : 60 years for salaried and 65 for self-employed.

A borrower has to submit three additional documents apart from what is required for a normal housing loan. Copies of all the property documents have to be handed over before approval of the loan. Borrower has to give a declaration stating that the loan amount would not be used for any other purposes. A valuation report of the property from the professional valuer appointed by the bank is a must. Identity proof and proof of residence along with income proof has to be provided. Salaried individuals have to submit their latest salary slip, Form 16 (along with salary certificate from the employer), and bank statement for the last 3 months. Self-employed people have to furnish copies of their IT returns for the last 2 years, balance sheet, and profit & loss account, bank statements for the last 6 months.

Fees & Charges

Different institutions have different ways of charging fees when you submit the loan application. All lenders charge a processing fee, which may vary from.25 percent to 2 percent. Some banks collect the processing fee along with the application. Most banks charge a prepayment penalty if the borrower forecloses the loan before the expiry of tenure. It is charged as a percentage of outstanding amount, anywhere from 1 to 4 percent. If the borrower wants to change from fixed to floating rate of interest or vice versa he has to shell out a fee. It can be as high as 2 percent of the outstanding principal. There are also charges like penalty for late payment of EMI; statement charges etc.

Overdraft & EMI

The loans against property are generally repaid in equated monthly installments (EMIs). The repayment period could be from two years to 15 years depending on the lender. SBI allows a borrower to divert surplus funds towards prepayment of the loan without attracting any penalty. Banks also offer LAP as overdraft. Here the customer is charged interest only for the amount that he withdraws from the account. Whenever he deposits funds into the account, it goes towards reducing the outstanding balance in the account. Taking a LAP may be an easy process. But remember to make repayments regularly. If you fail you could end up losing your home.

Everyone deals with having to wriggle out of a financial crisis at some point. If you have meticulously planned your finances and investments a temporary cash crunch may be easier to deal with. But very often we fail to do so although financial experts have been giving us this sound advice for many generations now. There may be many reasons for not being ready for such a situation either because you don’t realize it could happen to you, you simply because you can’t afford it, you spent your savings on higher education or your funds are all locked on long-term investments.

When you are suddenly hit by a financial road block the first thing to remember is – DON’T PANIC! Misfortunes hit everybody — whether it’s losing a job, an illness or just an unexpected expenditure. You still have several avenues you can explore including sounding out friends and relatives to help you tide over the situation. If that’s not the most comfortable option for you many companies offer employees personal loans at subsidized interest rates. You could check with your company to see if they offer such a facility. The biggest advantage would be that it will be hassle free when compared to a bank loan. Some other options available to you are listed below:

Bank Overdraft

Your bank may be willing to offer you an overdraft facility which will allow you access to cash in no time. A bank overdraft is relatively cheap and there is no paperwork involved in this. You can also apply for a loan or overdraft using you insurance policies, mutual funds, national saving certificates or government bonds, shares, securities etc. A loan against securities are much cheaper than personal loans and the borrowing limit may differ but is usually in the range of 60-65 percent of the values of these securities.

Loan Against Property

Offering a collateral is the best means to get a loan in an emergency as this gives the lender some security and can take care of the lender’s risk. This may also allow you to get the secured loan at a substantially lower interest rate than you would have gotten a secured loan for. If you are taking a loan against property the downside is that processing may take longer. If you need urgent cash, a loan against gold or car would probably be processed faster than a loan against property.

Personal loans

Personal loans are growing in popularity as a source of immediate cash. Although interest rates on personal loans are on the higher side many banks can sanction personal loans in less than a week. Personal loans offer consumers easy access to funds without the need to provide any security and if you already have an account with the bank it may be much easier for you to get a personal loan.

Credit card

Credit cards come in handy in a crisis situation and allow you to withdraw cash from ATMs. A credit card will usually have a cash withdrawal limit and interest charged on cash would also be different from what is levied for card usage. But if you need instant cash with no processing time, this is definitely the best option.

Moneylenders

The neighbourhood moneylender provides you money in an emergency without fuss. But you should resort to this as the last option after exhausting all other avenues. Interest rates of 50-60 percent annually are common with private moneylenders and they may take advantage of your desperation by charging hefty interest rates.