LoanRaja Blog- Personal Finance Guide

Unforeseen circumstances can land anyone in a financial crisis. Sudden loss of job, divorce, a serious accident, a major surgery or death of a dear one create need for urgent cash for which we may not be prepared. There may arise an opportunity for a foreign travel for which you don’t have immediate cash. How to find the required amount in the shortest possible time is a difficult choice to make. Do you want funds readily available to you whenever you need or desire? Personal loan is the answer. It is an any-purpose, no-questions-asked loan given by most banks and NBFCs. Interest rate is high as it is unsecured loan.

In case you have a little more time at your disposal you can explore the possibility of a Loan Against Property (LAP). If you own a valuable asset like a house or commercial property you can raise a loan against it. It is much cheaper than a personal loan as it is secured loan. But processing and documentation will take more time. First the lending bank has to get the property valued and has to be convinced about the repaying ability of the borrower. The loan is given as a certain percentage of the property’s market value (around 40 -60 per cent). Lending institutions have different threshold limits for Loan Against Property.

Tenure

Such a loan is usually available for a five-year period. LAP will have a longer tenure than a personal loan, usually a maximum of 10 years. The advantage of personal loan is that it requires less paper work and is sanctioned sometimes within three days. But the lender has to be convinced on your ability to repay the loan. Nobody is going to give you a personal loan of Rs.1 crore. The only way to get a loan for such an amount is to mortgage a property valued around Rs.1.75 cr. One can get personal loans from Rs.24,000 to ten lakhs. The threshold limit for loan against property is much higher.

Eligibility

Eligibility norms and documentation for personal loans and LAP slightly differ. While a customer seeking a personal loan must have a net monthly salary of at least Rs.7,000, a person seeking LAP must have a net monthly salary of at least Rs.12,000. Age requirement is 21-60 years in the case of salaried and for self-employed it is 21-65 years. It is same for personal loan and LAP. For both the loans identity proof, residence proof and income proof have to be furnished. Salaried individuals have to submit their latest salary slip, Form 16 and bank statement for the last 3 months.

Self-employed customers 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. For loan against property, photocopies of all documents related to property have to be handed over before approval of the loan. A valuation report of the property from the professional valuer appointed by the bank is a must. Some banks insist on the borrower to give an undertaking that the loan won’t be used for any purpose other than what is mentioned in the loan agreement. This is to avoid diversion of loan for speculation.

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.

LAP allows you to keep your property and have liquid funds. It is the cheapest retail loan after housing loan. Fixed rate loans are rare now as banks find floating rate more profitable. It is 30-40 percent cheaper than personal loan. Entrepreneurs find LAP an ideal source for funds for business expansion. Many borrowers land in debt trap after availing personal loans, which attract stiff penal interest in case of delayed payments. Failure to read the fine print can push a borrower deeper into debt.

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.