Loan Against Property (LAP) is one of the most effective and preferred ways to raise large loan amounts, by keeping your property as collateral with banks or other financial institutions. LAP allows a borrower to get access to big amounts at low rates of interest. Apart from the high disbursement amount, other key benefits of LAP include long tenure, low interest rate and repayment flexibility. However, there are a few common misconceptions about loan against property.
Misconception 1. Only Residential Property can be used as Collateral
The reality: Both residential and commercial property can be used to obtain a loan against property.
Typically, banks allow the prospective borrower to use either self-occupied residential or commercial property as collateral as long as you can submit documentary evidence to support ownership. In case of residential property you can use either your self-occupied residential property or a residential property that has been rented out. In case of commercial property, most banks accept prospective borrower-owned shops, residential buildings, plots that haven’t been developed yet etc. as collateral. However do keep in mind that banks accept the collateral property at their discretion and they often apply a higher margin on commercial property, which means lesser loan amount, as compared to residential property.
Misconception 2. The quantum of loan is based on the price at which the property was bought
The reality: The bank calculates the loan amount you can get as per its own evaluation.
The method followed by banks or NBFCs when granting a loan against property involves the evaluation of the property by a bank approved evaluator or by the bank’s own evaluator. At the time of evaluation, some of the key factors taken into account include the circle rate, age of the property and current condition of the property. Based on such criteria, the evaluator assigns a value to the property you intend to use as collateral. Additionally, the lender keeps a margin on the loan. For example if the lender keeps a margin of 40% on the loan, you are lent up to 60% the prevailing property value as a loan against property. In effect, it does not matter at what price the property was purchased, all that matters is the current value of the property when it comes to determining your LAP eligibility.
Misconception 3. The bank takes possession of the collateral property when granting an LAP
The reality: In case of a LAP, the property used as collateral remains under your control.
This misconception actually stems from the way a gold loan is handled wherein the lender holds the gold that has been used as collateral till the loan repayment has been completed. However, this is not the case when a lender grants a loan against your property. In case of a LAP, the property documents have to be submitted with the lender; but, the property itself will continue to remain under your control. For example if you use your self-occupied residence as collateral for LAP, you and your family can continue to reside in the house during the loan tenure. Similarly, rental income from a commercial property owned by you will continue to be part of your income even if you have used it as collateral. That said the lender does have legal right to assume control of the collateral property in case of default by the borrower.