FINANCE TIP OF THE DAY
Can you afford your loan?!
Know the quantity of loan you can afford. The banks may sanction loan based on your income but you should look at your monthly expenditure and see if you can afford the maximum that banks offer. As a thumb rule, remember not to let your credit exceed 40% of your income!
Money sitting on your LAP (Loan Against Property)
Loan against property can be taken against a self-occupied residence or a commercial building. The main requirement on the bank’s (lender’s) part is that there should not be any other encumbrance.LAP is the most secure of loans hence the lending rate is generally very low compared to other loans.
Want money for your Child’s marriage? Or to fund your business expansion? Well the money is already in your house! Read further…
Loans generally can be classified as secured or unsecured. Personal loans and Credit cards come under the un-secured loans category because we are not pledging any of our assets (collateral) to get the loan. Housing loans, loan against property (LAP), loan against shares (LAs), and car loans come under the secured loan category as there are collaterals involved.
Loan against property can be taken against a self-occupied residence or a commercial building. The main requirement on the bank’s (lender’s) part is that there should not be any other encumbrance.
Lap is the most secure of loans hence the lending rate is generally very low compared to other loans. However, because of the structure of lending by banks, they tend to be slightly higher than housing loans.
The eligibility criteria for getting LAP is also liberal, as the property is available as collateral. The repayment term can also be long from 5 to 15 years.
When to look at LAP?
For anyone who has a house or commercial property and is looking for a loan, LAP should be the first option. The only loan with better features could be the gold loan. But there could be a lot of sentiments attached to pledging gold, so it generally gets done as the last alternative. That leaves the LAP as the better choice.
Though a housing loan and the LAP are secured against the property, LAP is on the existing property and the value of the property is released for productive activity. For a businessman looking to expand business, a LAP comes in handy. As they do not have to look for costly sources and the processing is also much faster. A few banks may even give an overdraft facility against the property; this will help the business as interest will need to be paid only for the amount withdrawn.
Funding children’s education can also be done using LAP; also their marriages. But as a general rule, one has to be a cautious when taking loans for expenses.
Advantages of LAP
Lap has a number of typical advantages:
- Value of the asset owned is released for productive use.
- Processing is faster than a housing loan as the property is already in our possession.
- Partial pre-closure is allowed without any penalties. This is an advantage as the overall interest burden or the tenure of the loan can be reduced by paying small additional amount (some banks permit a minimum part payment of Rs.5000/- most start at Rs.10,000/-).
- If the value of the property has risen over a period of time, a re-financing option can be used to increase the loan amount. This feature again is very useful for businessmen, who are on an expansion spree. They can use the same property to continuously build the business.
- The property continues to be in the ownership of the borrower. In case the borrowers are not able to pay the loan, they can sell the property and then settle the loan. This may leave surplus cash for the borrowers to restart their financial life.
Some Disadvantages of LAP
- Banks generally do not give loans beyond 60% of the value of a house property and 50% of a commercial property.
- New businesses generally cannot have access to LAP. They should have been in existence for at least 3 years. Salaried persons of course can get it if they are employed for over 1 year itself.
- There will be some processing charges usually in the range of 0.5% to 1% depending on the support given by the bank. Some banks may ask us to do the running around to get the encumbrance certificate and legal opinion ourselves and charge us lesser.
Points to be Cautious About
Loan Against Property by itself is a very benign loan. So there is not much to be afraid about. However, there are a few points to be cautious about:
- Fixed Vs Floating Loan Conundrum: As in a housing loan, in LAP too a decision has to be taken related to this. In a low interest rate regime it is always better to take up a fixed interest rate. However clauses related to jacking the slabs up even in a fixed interest rate loan needs to be verified. For floating rates, the increase and decrease bands have to be checked.
- Inadvertent Shift from Overdraft to EMI: Some smart (unethical!!!) salesman may sell off a LAP in EMI format to businessmen seeking an overdraft. This causes unexpected high cash flows for the business.
- Assessment of Property Value: Support from the owners to give the deeds of recent sales in the neighborhood will help the underwriters of the bank in assessing the value of the property better. Generally they tread on the cautious side.
- Partnership Business: In a partnership, LAP can raise some issues among the partners on – Whose property is to be pledged? This is particularly a problem if at a latter point in time one or some of the partners wish to leave the business.