Loan Against Property (LAP): Types, Benefits, and Risks

A loan against property is a secured loan offered by banks and other financial institutions in which borrowers pledge property as a security against the borrowed amount. Depending on the borrower’s profile, one can give the security of a commercial or residential property. If you want to secure funds for any need and you don’t have any issue in pledging a property, getting a Loan Against Property is undoubtedly the best way for the property. There are several benefits of getting this loan that we will discuss in the later part of this post.

What is a Loan Against Property (LAP)?

​​​A Loan Against Property (LAP) is a kind of secured loan that is offered against a property that is used as collateral. Individuals can provide owned land, commercial premises, or a house as an asset to avail of this loan.​​

Apart from the basic understanding of a Loan Against Property, it is necessary to understand that the borrowed amount from this loan can be used for any purpose just like a personal loan. Some of the commonly done applications for this loan amount are home renovation, starting a business venture, hospitalization expenses, and several others.

How Does Loan Against Property Work?

A Loan Against Property allows people to get nearly 70-75% of the property value as a loan amount. For this, they need to submit the property documents along with several other docs to avail of such a loan. Once the document verification is done, the loan approval is granted. This is followed by the transfer of the loan amount to the borrower’s bank account. The documents of the pledge property will be in the possession of the lender until the loan amount is repaid as per the loan schedule.

Types of Loan Against Property?

There are primarily three types of Loan Against Property:

1. Loan for Lease Rental-

In this kind of loan, the borrower can pledge a rental property to secure the loan amount. Regarding Lease Rental Discounting, the amount is provided to the borrower against the expected rental income from the property. The rent received from the property is sent to the lender.

2. Loan Against Residential or Commercial Property-

In this case, the pledged asset can be a residential or commercial property which is put by the borrower against the loan amount. This type of LAP is a good choice for those who own a property and seek to get funds for their benefits by using their property as collateral.

3. Loan For Commercial Property-

This Loan Against Property enables borrowers to use a property as collateral to get commercial property. This approach of securing funds is great among traders or business owners as it enables them to get bigger and more luxurious office space, a manufacturing unit, or even a warehouse.

Home Loan vs Loan Against Property Difference?

Home Loan		Loan Against Property
A person can apply for a Home Loan even if the property is under construction or the person wants to buy a new house		It is for those who want to seek funds against a Collateral that could be a residential or commercial property. The secured funds can be used for any purpose.
The borrower can get 85-90% of the property value		In most cases, lenders give a loan amount of 65-70% of the property's market value. The amount varies between a residential and a commercial property
Interest rates vary between 6.75% - 10%,  given the specific lender and the chosen loan amount		Rates range between 7.35% - 10.5%  given the chosen bank and the borrowed amount

Eligibility For Loan Against Property-

Contrary to unsecured loans, a Loan Against Property is a safer and more effective way to secure funds on a property. The loan amount will be finalized by the lender given the market value of the property to be pledged and your existing income. The loan amount and repayment criteria will also be dependent on the borrower’s age and CIBIL score.

Documents For Loan Against Property-

Just like other types of loans, the most commonly asked documents for an LAP are income proof, address proof, identity proof, property docs, property valuation report, etc. Make sure to stay true to the documents you submit during the loan application as the same will be verified.

• Loan Processing: The lender tends to process your application for a Loan Against Property after reviewing the furnished information and being assured that the borrower will stay true to the repayment commitment. A field visit may be carried out to evaluate the property that will be used as collateral.
• Cost: In addition to the loan's relevant interest rate, the lender may also charge a processing fee, mortgage stamp duty, and other fees.
• Loan Disbursement: The loan is disbursed when all requirements have been completed and the loan has been sanctioned. The loan can be issued in one payment or up to three payments, which may or may not be spaced out over some time, depending on the loan's amount.

What are the Benefits of a Loan Against Property (LAP)?

The benefits of taking out a loan against your property are numerous and compelling like the ones discussed below:

• Various Types of Property to Choose From: Different properties such as commercial property, residential property or self-occupied land can be used as collateral when applying for a loan against property. The borrower can retain ownership and utilize the property while receiving funds against it. 
• Competitive Interest Rates Available: A loan against property offers borrowers the advantage of competitive interest rates. With low interest rates, borrowers can enjoy lower EMIs, reducing the overall financial burden on them. 
• Loan Amount can be Adjusted: A loan against property is a secured loan, which means borrowers can get a higher amount compared to unsecured credit options such as personal loans. The loan amount depends on the current market price of the property. 
• Extended Loan Duration: A loan against property provides more flexibility in repayment terms compared to a personal loan. This type of loan typically offers a longer tenure of up to 15 years, which can help lower the financial burden on the borrower. 
• Deductions for Taxes: Section 31 of the Income Tax Act provides tax benefits on the interest rate for a loan against property, while Section 24 mentions a tax deduction of up to 2 lakh rupees for a loan taken to build a new house. 
• Fast Approval: A loan against property offers the advantage of a quicker application and verification process compared to unsecured loans. This is because unsecured loans lack collateral, so lenders need to thoroughly assess repayment capacity. Additionally, the convenience of applying online for a loan against property saves time. Loan approval can be expected on the same day.
• Minimum Documentation: A loan against property offers the advantage of requiring minimal documentation for the loan application process. In contrast to other loan types, the required documentation for a loan against property is straightforward.
• Low or No Foreclosure Fees: Loan against property often has minimal to no foreclosure charges, allowing early repayment without worry. Choose lenders who communicate all charges transparently and list them in loan documentation to ensure no hidden charges.

What are the Risks and Considerations Associated with Loan Against Property (LAP)?

• Problems with Valuation: Valuation problems can arise due to the lack of a uniform valuation norm for the property used as collateral for the loan. This can lead to lenders using different criteria for evaluating the collateral and individual banks may have their own specific valuation rules.
• Bank Controls the Property: If the borrower cannot repay the loan, the bank will control the pledged property. The bank can either extend the loan or sell the property to recover the money.
• Approval Process Takes Too Long: Getting a loan approved can be a lengthy process, which may not be ideal during a financial emergency.
• Default Risk and Repayment Burden: Taking a loan against property means being responsible for repaying the borrowed amount with interest. Failing to do so can lead to default, legal consequences, adverse credit history and the risk of losing your property. It is important to assess your financial capabilities and income stability before taking a loan.
• Risk of Changes in Interest Rates: Opting for a floating interest rate on an LAP exposes you to the risk of interest rate fluctuations, potentially leading to higher monthly EMIs. It is crucial to assess your risk tolerance and select an interest rate option that aligns with your financial objectives and offers stability in your repayment plan.
• Risks in Law and Documentation: Loan Against Property has legal and documentation risks. Understanding and following the legal requirements and documentation is important. Engage legal professionals to review the loan agreement and property documents and ensure compliance with laws. Due diligence and understanding the legal framework can help mitigate risks and protect your interests.

FAQs

Q. What Is A Loan Against Property (LAP)?

-: A Loan Against Property is a secured loan where borrowers pledge a residential or commercial property against the loan amount. The borrowed amount can be used for any purpose.

Q. What Are The Different Types Of Property I Can Pledge Against A LAP?

-: One can easily pledge either a residential property or a commercial property to avail of a Loan Against Property.

Q. How Can I Repay The Loan?

-: It is very easy. The borrowed amount needs to be repaid in the form of Equated Monthly Installments (EMIs). The EMI date and amount will be confirmed at the time of loan disbursal.