A loan against property (LAP) is exactly what the name implies — a loan given or disbursed against the mortgage of property. The loan is given as a certain percentage of the property’s market value, usually around 40 per cent to 60 per cent. Loan Against Property allows you to borrow up to 70% of the market value of your residential or commercial property, then use the money for personal expenses.
It is often a confusing situation for a borrower to choose between a loan against property mortgage or personal loan. A personal loan is given on the basis of income of applicant whereas the LAP is given on the basis of a combination of income and property kept as a mortgage. A Personal loan is usually taken for personal financial needs like medical expenses, wedding or vacation funding, house repairs or renovations. Applicants are usually confused between these two options. Let us look at which loan option among them is better for you –
Banks provides a personal loan based on the repayment capacity of the borrower which depends on his salary, credit worthiness and previous repayment track record. A loan against property is usually granted against your property as a mortgage in addition to above factors. A LAP is dependent on the market valuation of the property.
Personal loans are usually provided for a small ticker size like 3-5 Lakhs and loan against property is usually provided for a large ticker size. Banks can lend up to 40%-70% of the current market value of the property. For example, suppose the market value of your property is Rs 1 Crores then you are eligible for a loan amount of 50-60 Lakhs from the bank. If you require a loan amount of large amount for your business purpose then a loan against property is a better option compared to personal loan. Since, LAP is a secured product and a personal loan is not, interest rates offered on LAP are usually lower compared to interest rates offered on personal loan Usually, interest rates offered on LAP is between 12% – 16% and interest rates offered on personal loan on are between 13% and 22%. A LAP is offered for longer tenures up to 15 years and a personal loan is offered for a shorter tenure of 3 years up to maximum limit of 5 years.
As loan against property is usually offered for longer tenure compared to a personal loan, EMI for it turned out to be lower compared to personal loan.
For availing a loan against property you need to put your original property papers with the lending institutions but for a personal loan you don’t need to put any collateral for your loan application.
Usually, the processing time for a LAP would be longer compared to a personal loan. It is provided against property as a mortgage. Hence, the bank needs to verify your property from legal and technical point of view. This verification usually takes some time. A personal loan can be disbursed in 3-5 days and a LAP is disbursed in 3-10 days depending on reports.
As we can see from above discussion that a loan against property mortgage is a better option compared to personal loan. It offers advantages like higher tenure, lower interest and higher loan amount. We can safely say that if you want a larger loan amount with longer tenure you should go for a LAP. In fact, it is one of the better options among banking products available in the market. LAP is one of easiest financing option available currently in the market. It is provided by taking property as a mortgage. It is a common misconception among the borrower community that final loan amount should depend only on the final market value of the property. Usually, borrowers ask for questions like why I shouldn’t get a loan amount of 50 lakhs at least if my property value is Rs 1 Cr? This question is quite natural and you will get the answer to this in the following discussion. Yes, we agree that property value plays an important role in the final amount of your loan application but it is not the only factor on which final loan amount is decided. Your final loan amount depends on several factors like mentioned below-
Income – The income you generate is one of the most important factors for your eligibility calculation. If cibil scores you are a salaried individual then your gross salary would be taken into account and if you are self-employed then your profit for that year minus any obligation would be taken into account.
Market value of property – LAP is a loan given by taking property as the mortgage. It is very important that property being mortgaged has clear title and is free of any legal disputes. These two are the minimum requirement for taking property as the mortgage. In addition, the property should be easily marketable and saleable in the case of default. Usually, banks provide a loan of 40% to 70% of market value of property.
FOIR – FOIR stands for fixed obligation to income ratio. It is calculated by taking into account your fixed obligations like EMI on term loan or loan against property. Usually, a FOIR of 30-50% is offered on your monthly income. A FOIR percentage can be increased or decreased depending your income.
Repayment track record – If you are having an existing loan(s) running then your repayment track record would be closely monitored. It is credit score range expected from your side that you must have paid your existing EMIs on time. If there is/are any default(s) in your repayment, then it should be clearly explained with logical justification
Average Banking Balance – Often abbreviated as ABB in the banking industry, it is the average bank balance that you maintain on your bank account. Usually, banks look for average bank balance of twice of the EMI for your loan.
Other factors – Apart from above factors lending institutions would also look into other important loan against GPA property factors like –
* Business vintage/Current work experience.
* Future expenses.
* Number of dependents on applicant.
* Age of applicant and Co-Applicant.
* CIBIL record
* Loan purpose.
* Reference check.
From the above discussion, it pretty much clear that your final amount in the loan is just not dependent only on your property. There are several other factors for calculating your final loan amount in your loan application. But, having said that, a property with good market value and in good condition would always fetch a better loan amount compared to other property which is less marketable.