Loan against Property Glossary & Terminology to know

A loan against property (LAP) is a type of secured loan where your property acts as collateral. This means the lender can seize your property if you default on the loan. LAPs are a popular choice for individuals and businesses seeking substantial sums of money for various purposes. Through this article, you can learn about the various important terms of LAP.

Understand the basics

Before getting into anything complicated, here's what you are learning about.

1. Loan Against Property (LAP): It is a secured loan that allows you to leverage the value of your property to access a substantial loan amount. Whether residential or commercial, the property is kept as collateral, and the borrower retains ownership and possession. It’s an ideal option for those who need funds for various purposes, from expanding a business to handling personal financial commitments, without selling their valuable assets.
2. Collateral: It's the property you pledge to secure the loan. The lender holds a legal claim over the asset until the loan is fully repaid. If the borrower defaults, the lender can auction the collateral to recover the outstanding loan amount. This makes LAP a less risky option for lenders, often resulting in lower interest rates compared to unsecured loans.

   

   Caption: an image highlighting the give and take of collateral, and receiving money against it

3. Loan-to-Value (LTV) Ratio: It refers to the amount of loan you can get as a percentage of your property's market value. Typically, lenders offer between 60% and 75% of the property's value as a loan. This ratio is a crucial factor in determining both your loan amount and your risk exposure—a lower loan-to-value ratio means less risk for the lender and more manageable EMIs (equated monthly instalments) for the borrower.

Types of LAP

Loan against Property has various types of loans depending on your needs. Here are some of these:

1. Mortgage Loan: It is the most common form of loan against property, where you can use your residential property as collateral. It offers significant flexibility in how you use the funds, whether for a child’s education, medical emergencies, or even home renovations. The interest rates on mortgage loans are usually competitive, making it one of the most preferred choices among borrowers.
2. Commercial Property Loan: If you own a commercial property, such as an office space or shop, you can avail of a commercial property loan. This is particularly advantageous for business owners looking to raise capital for business expansion. Commercial property loans typically have different interest rate structures and eligibility criteria compared to residential loans, as the risk factors vary.
3. Bridge Loan: It is a short-term loan designed to "bridge" the gap between purchasing a new property and selling an existing one. Although bridge loans tend to have higher loans against property interest rates due to their short tenure, they are valuable for property investors or individuals in urgent need of liquidity.

Interest Rates and Repayment

1. Fixed vs. Floating Interest Rates
   When opting for a LAP, you’ll often be faced with the choice between fixed and floating interest rates. Fixed rates remain constant throughout the loan against property tenure, providing stability in EMI payments, but they may be slightly higher than floating rates. Floating rates, on the other hand, fluctuate based on market conditions, which can either increase or reduce your EMI over time. Understanding which option suits your financial planning is crucial to long-term loan management
2. EMI Calculation
   Your EMI depends on the loan amount, interest rate, and loan tenure. Longer tenures result in smaller EMIs but higher overall interest payments. Shorter tenures mean higher EMIs but lower interest outgo. Calculating your EMI through a loan against property calculator beforehand helps ensure that your monthly payments fit comfortably within your budget.
3. Prepayment Penalties
   While paying off your loan early might seem like a good idea, some lenders impose prepayment penalties to compensate for the lost interest income. It’s essential to read the fine print and understand whether your loan allows for prepayment without penalties. Avoiding hidden charges like these can save you a significant amount of money over the loan tenure.

Eligibility Criteria

Now that we know the basics of a LAP, you must understand the loan against property eligibility terms to apply for the loan.

1. Property Ownership: To apply for a LAP, you must be the legal owner of the property being used as collateral. This can include both individuals and businesses, provided the property is free from legal disputes or encumbrances. Joint ownership is also permissible, but all owners must be co-applicants on the loan.
2. Income Proof: Lenders require applicants to provide proof of steady income to ensure they can repay the loan. Salaried individuals will need to submit salary slips and bank statements, while self-employed professionals may need to provide profit and loss statements, tax returns, and other relevant financial documents required for loans against property. A strong financial profile increases your chances of loan approval and may also help you negotiate favourable terms.
3. Credit Score: Your credit score is a reflection of your financial behaviour and repayment history. A high credit score—typically 750 or above—makes you a more attractive applicant for a loan against property. It signals to lenders that you are reliable and less likely to default on the loan. A good credit score can also lead to more favourable interest rates, saving you money in the long run.

Wrapping Up

Understanding the terminology and processes involved in Loan Against Property can empower you to make informed decisions. Whether it’s choosing the right type of loan, negotiating interest rates, or preparing your documents, a solid grasp of LAP basics will help ensure a smooth borrowing experience. If you’re looking to secure competitive interest rates and expert guidance, IIFL Home Loan can assist you with your financial needs.