Starting a business in India is no easy feat at all, especially when it comes to arriving at the decision of choosing the source of funds for raising capital. As more and more startups are being built with unique innovations, one of the difficult situations which a new generation entrepreneur could face is when an idea dies due to a paucity of funds. Therefore, we discuss whether a loan against property is an ideal choice for sourcing funds to start a business.
Firstly, LAP is a secured loan wherein an entrepreneur mortgages an owned property and borrows funds against it without having to lose ownership or sell the asset for funds. Entrepreneurs can usually put either a residential or commercial property as collateral while applying for LAP. Before submitting an application, check your Loan Against Property Eligibility, and then entrepreneurs can go ahead if qualified as per their repayment capacity. Also, let us see how LAP works and what it offers, depending upon various parameters.
As a loan against property is a secured loan backed by collateral in the form of property, there is a usual presence of low Loan Against Property interest rates, especially when compared to other loan options such as personal loans. Interest rates on loan against property depend upon the loan amount (dependent on the LTV ratio offered by the lender) and repayment capacity of the individual/business.
For LAP, the maximum loan amount would depend on varying factors included in Loan Against Property Eligibility criterion. The amount to be disbursed depends upon the property type and loan to value ratio (LTV) offered by the lender. Lenders provide up to 50%-70% of the property’s value as LAP. Maximum loan against property amount may go as high as Rs.10 crores, depending upon the property characteristics and value, therefore varying on a case-to-case basis.
However, high loan amounts along with lower Loan Against Property interest rates may seem lucrative to many businesses and individuals. But before opting for LAP, entrepreneurs must remember that they have to repay the loan along with interest cost, and a failure to do so may, in worst cases, lead to losing the ownership of property.
Loan against property, being a secured loan and offering high loan amounts to businesses and individuals, provides higher loan tenures so that borrowers can repay conveniently, along with lower EMIs. LAPs or loans against property generally offer up to 15 years repayment tenure, which is higher than that of alternative options such as personal loans providing maximum tenure up to 5 years usually. Hence, while starting a business with funding through LAP, higher repayment tenure would definitely assist the entrepreneur in repaying the loan conveniently over a longer tenure. But remember, lenders would finalize your tenure after factoring in the Loan Against Property Eligibility criterion put forth, implying that not everyone is eligible for the available loan tenures as per LAP’s product features. Also, even the Loan Against Property interest rates would vary for different tenures for some lenders. So it’s best to check the different tenures and corresponding rates before submitting the final LAP application.
Right lender for your LAP
In the case of LAP, the loan processing, along with documentation and other formalities as per Loan Against Property Eligibility, involve an additional step in the form of the lender’s evaluation of the property to be mortgaged. This makes it even more important to choose the right lender as per your eligibility and requirement. Borrowers may use online financial marketplaces to compare and choose the most suitable lender for themselves. Since LAPs are generally taken for longer tenures, up to 15 years, and parameters such as Loan Against Property interest rates, processing fee, Loan to value (LTV) ratio should form a major basis while comparing various lenders and zeroing in on anyone.
Property’s valuation and Loan disbursal
Before finalizing the property loan’s amount, lenders take into account various factors which impact the property’s valuation. A high valued property won’t necessarily ensure a high loan amount too. Valuation of the house property depends upon the location of the property, age of the property, infrastructure, geographical stability etc. Post valuation, the loan amount to be disbursed to the business is finalized, which takes into consideration the entrepreneur’s income and repayment capacity, business model, cash flow projections etc. Entrepreneurs must be confident regarding the repayment of the loan & demonstrate a strong business model which convinces the lender to grant the LAP at lucrative Loan Against Property interest rates.
Impact of credit score and report
Before submitting your loan application in accordance with Loan Against Property Eligibility, applicants must check their credit score as well as credit report, as errors in these may prove to be highly influential to your loan approval chances. Lenders check your credit history through your credit report and score while evaluating your LAP application. A lower credit score depicts you as a less creditworthy borrower who is more likely to default in future, thus leading to either loan rejection or approval of loan along with a higher interest rate.
Also, review your credit report periodically to ensure no error or fraudulent activity gets bypassed and harms your credit score, resulting in rejection of loan as well. Borrowers can check their credit score and fetch credit reports for free through online financial marketplaces, along with monthly updates.
Assemble proper documentation
Loans against property can be availed by both salaried and self-employed professionals along with businesses. For the non-salaried category, additional documentation is required for income assessment, such as audit reports, last 2-3 years’ income tax returns (ITR), KYC documents, financial statements, etc. Additionally, for LAP, legal documents of the property are required to be submitted by the borrower to assess the property and ownership’s authenticity.
The next step involves evaluating the property to determine the loan amount as per the LTV ratio offered by the lender, which is usually up to 50-70% of the property’s current market value. Once the lender has checked the credibility of the borrower, the final loan amount is decided and sanctioned against the property provided as collateral.
Therefore, each borrower must do a bit of research beforehand in order to assemble the required documents in time and ensure a smooth loan procedure subsequently.
Summing it up
If you have a commercial, residential or industrial property or even plot, you can pledge it as collateral to avail a big tick amount through LAP and accordingly kickstart your business/startup. And repay conveniently in EMIs across 15-20 years of tenure, hence relieving you from the stress of lump-sum repayment while just beginning and stabilizing your new business. Also, another thing that makes it prudent to take LAP is that it offers higher loan amounts than other loans like personal loans. However, remember that the value of your property would play a key role in determining your LAP amount.
Read also: Fastest Ways to Get a Loan