Evaluating Loan Against Property Offers

Rahul Singh Shekhawat July 24, 2023

8 min read

Overview

Use your property to get the loan amount sanctioned but remember, don’t fall into the trap of high-interest rates. A loan against property (LAP) is availed after mortgaging the property to the lending institution. Generally, banks and NBFCs approve loan against property (LAP) applications faster than any other application due to the less risk associated. Lenders will evaluate and assess the pledged property to check whether the property fits the eligibility criteria or not.

Whenever you finalise your Loan against property (LAP) application, always check with multiple lenders to get the lowest possible interest rate and faster credit of the sanctioning amount. It's better to take the help of OneNDF, just like I did. Last year in December, I closed my deal with HDFC Bank, taking LAP Dropline Overdraft (DOD) at the best rate in the existing market of that time. OneNDF helped me close the best deal of my life, and the best part is I still enjoy their after-deal benefits.

Many of our readers have raised a query asking about the types and offers made in loans against property (LAP). Thus I’ll be solving this query with the help of today’s business feature. Stay tuned to learn more.

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Categories offered in Loan against Property (LAP)

Loan against property (LAP) is a credit facility that can be acquired only against the collateral/ property. In order to get the loan sanctioned, one needs to pledge the property he owns. Property can be residential, commercial or industrial. Lending Institutions offer loans against property into 4 broad categories that we’ll discuss below.

Term Loan / LAP Normal

Term loans, often known as LAP, are usually offered by lending institutions for a fixed time duration that is repaid in regular installments. Duration offered in term loans is generally long compared to other loans; it usually ranges from 1 to 10 or 30 years. It is an EMI-based loan that is repaid in installments.

There is no fixed interest rate in term loans. It depends on various factors such as market conditions, applicant’s profile and credit score. LAP carries a fixed or variable interest rate. One can acquire term loan funding to fulfill their personal/professional needs. Also, it enhances the business cash flow. The term loan is itself categorized into three segments, namely.

Short-term loan Intermediate-term loan Long-term loan

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LAP DOD (Dropline Overdraft)

Dropline OverDraft is another kind of loan against property in which the drawing power keeps declining in proportion to the limit of principal payment. It allows borrowers to withdraw and deposit funds at their convenience. It has the flexibility of a normal banking account, just like normal LAP; DOD is also financed based on the market value of the property.

In the Loan against property DOD interest rate amount is paid on the amount utilized, and the principal amount borrowed is fixed for EMI. Property pledged must be approved and authorized. LAP DOD is available to professionals, self-employed, partnerships firms/LLPs, and public/private ltd companies. Dropline Overdraft is categorized into two types.

Fixed-principal repayment Variable-principal repayment

{The next two loans against property categories are specifically designed for business perspective and funding, including other purposes as well. Business owners needing working capital generally avail of these two financial products.}

Overdraft Limit

The overdraft limit is renewed every year; the limit is allotted on the basis of financial statements. The limit in OD will remain constant. The overdraft limit does not require current assets as security, but it can get extended by taking shares, FDs etc. A normal current account is required; the interest rate charged is comparatively higher than cash credit but is calculated only on the amount overdrawn. Individuals opt for the Overdraft facility in case of insufficient bank balance, which is approved based on a person’s credibility.

[Note: Not necessarily used for Business purposes.]

Cash Credit Limit

Cash credit is the short-term finance required for working capital needs allocated for a specific business operation. A separate cash credit account is opened with a bank that avails the facility of cash credit. Business inventories and receivables work as a security for allowing this facility.

The sanctioning limit is usually the percentage of stocks or receivables. CC limit is allowed for 1 year and is renewed every year; in certain cases, renewals are stipulated as half-yearly as well. Interest is calculated on the basis of credit allowed and is comparatively less than the OD limit. The CC limit keeps changing with the change in the value of current assets.

Winding Up

Lending institutions, i.e. Banks & NBFCs, offer loans against property to fulfill the high credit needs of individuals. LAP is a secured form of loan that charges a lower rate of interest if compared with any other unsecured loan due to the involvement of collateral/security.

Financial products offered in loans against property can be used for distinct purposes. One of the specific products that LAP offers and is widely used by business individuals to meet their goals is the Cash Credit limit - which is short-term finance used as working capital and is renewed every year. In CC limit business inventory and cash receivables work as a security and is considered comparatively less risky than other LAP products.

Evaluating Loan Against Property Offers: Frequently Asked Questions

Q.1 How do you evaluate property value for a loan?

After calculating the Loan-to-value ratio, property value is calculated using the formula.

LTV= Principal Amount / Market Value of the Asset/Property.

Q.2 Is it reasonable to take a loan against property?

LAP applications are entertained faster as the lender’s risk is reduced, and losses may get recovered by making a legal claim on the property.

Q.3 Which bank is best for Loan against property (LAP)?

Axis and Kotak Mahindra Bank are considered best for loans against property.

Q.4 What is the maximum OD limit?

Overdrafts are offered a maximum of 90% of the fixed deposit amount if you are willing to keep FD as collateral/security. Also, a less interest rate is charged.