Beginners Guide To Loan Against Property (LAP)


For a business to grow, it must expand; and doing that needs funding. However, when business profits cannot support expansion plans, the only other financial assistance comes from a loan.

The business owner can take an overdraft or a project loan to overcome his financial need. But a better alternative is a LAP loan.

The borrower pledges his property with the lender to secure a loan generally for large amounts. The lender charges a specific percentage as interest on LAP. The borrower repays components of the loan and the interest thereof in predetermined installments quarterly, monthly, or annually. 

Properties for LAP

Lenders accept the following properties as security for LAP:

  • Industrial properties like a factory, warehouse or manufacturing unit or business premises
  • Commercial properties, like shopping complexes, shops, office premises, etc.
  • Residential properties, like houses or flats

The following properties are not eligible to LAP:

  • Vacant land that is an agricultural property
  • An incomplete building whose builder is not on the lender list of approved builders
  • An under-construction property that is not 90% complete

Property Evaluation

The lender checks the property for any encumbrance such as:

  1. The legal title of the property
  2. The property is not under litigation
  3. No arrears of municipal dues on the property
  4. The property is not marked as illegal or for demolition
  5. The construction on the property should not be more than 20 years old.

Valuation of Property

The value of the property is crucial in the sanction of the loan. Ideally, a certified valuer visits the property to ascertain the value after discussions with local brokers.

They extract other necessary information from the internet. Factors such as the property's age, its municipal value, cost of construction, location play a crucial role in establishing its value.

Calculation of LAP

Lenders consider the borrower’s current income to calculate the amount of LAP. The lenders check the amount that you can afford to pay as installments. The lenders calculate the loan amount depending on the amount the borrower can pay as EMIs periodically.  

 Lenders for LAP

Banks, NBFCs, and private lenders offer LAP. Some lenders charge the lowest and some lenders charge the highest Loan Against Property interest rates. 

Click here to check - Latest Loan Against Property Interest Rates

Purpose of the Loan

Although the borrower must state the purpose for which he has taken the loan, the purpose of the loan does not matter.

Repayment Options

  • The borrower must repay a part of the loan as agreed at the time of loan sanction, and the interest thereof periodically
  • Banks deduct the installment amount from the borrower’s bank account on the appointed date. The procedure continues until the loan is closed

List of Documents

The documents for processing a LAP differs based on the lender and borrower. Ideally, these are the documents the borrower needs to submit.

  1. Borrower’s KYC. If the borrower is a firm or company, the KYC of all directors, or partners
  2. Proof of Address/ business
  3. Memorandum/ Articles of Association (for Companies)
  4. Board resolution (for Companies)
  5. Past 3 Income Tax Returns
  6. Balance Sheet, Profit & Loss account
  7. Bank statement
  8. Photographs
  9. Property papers

Conclusion

The point to keep in mind while securing a LAP loan is that if the borrower defaults, they could lose the property. It is thus better to maintain caution while taking such a loan. You can indeed receive a large amount of money as LAP. The problem is not in receiving but in paying back. It is better to take only as much as you can comfortably repay.