Loan Options
LAP commonly known as property loan is a loan provided by the bank/financial institution against the mortgage of your property (residential or commercial) provided the same has not been put up as security for any other purpose. LAP differs from a mortgage/home loan which is a taken to buy a property; LAP is a loan taken by putting up the existing property as a security against the loan.
When you find yourself in a spot of bother as far as finances are concerned, due to medical emergencies or losses in business or requirements to fund your child’s education or any other need, let not liquidation/sale of assets be your only option to solve the current cash flow problems. Financial markets in India now provide several loan products that will help you to keep intact your assets but at the same time provide you with the finances you need to tide over the situation. Some of the products available include personal loans, Loan against property (LAP), Loan against security (LAS) and gold loans.
- Personal loans
These are loans given to individuals without any security, collateral or guarantor on the same. Hence they are unsecured loans. The quantum of loan to be given will be based on the credit rating and the monthly income of the individual. The processing of this loan is very quick because of minimal paper work. The rate of interest on this type of loan is very high and is second only to the interest rates charged by credit card companies.
When is a personal best taken?
- If there is an urgent need for cash, personal loans may be an option because of the quick processing.
- Paying off your credit card dues because the interest charged on credit cards is very high. Therefore taking a personal loan may reduce the amount of interest that you will pay.
- Personal loans are very expensive and should be resorted to only if you have no other choice and you are in need of short-term cash.
- LAP commonly known as property loan is a loan provided by the bank/financial institution against the mortgage of your property (residential or commercial) provided the same has not been put up as security for any other purpose. LAP differs from a mortgage/home loan which is a taken to buy a property; LAP is a loan taken by putting up the existing property as a security against the loan.
- The maximum loan amount would be anywhere in the range of 40% and 60% depending on the market conditions and other factors.
- The borrower can either opt for an overdraft option where he is required to pay interest only on the amount withdrawn or a lump sum loan amount. The disadvantage of an overdraft facility is that the interest rate charged may be higher, in some cases up to 0.5% and also annual processing fees will be charged. Besides, if you want the overdraft facility, you have to take the loan only from the bank as other financial institutions do not offer saving/current account. In case of a lump sum loan, processing fees are charged only once when the loan is taken and also the individual can approach either a bank or financial institution for the loan.
When is an LAP best taken?
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- Long tenure loans: For individuals requiring funding for a long periods of time, LAP can come very handy because the tenure of these loans can be a maximum period of 15 years
- Large Loan amount: Individuals requiring substantial funds also should consider this loan option as a large loan is possible. Of course it depends on the property value. There is no restriction as in case of personal loans where the maximum loan permissible is Rs. 10 lakhs.
- Lower rate of interest: On account of the security provided in terms of the house, the rate of interest charged by banks tends to be much lower than personal loans
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- LAS is a mechanism wherein an individual is given a loan against the pledge of securities. Every bank has its individual list of approved securities against which they will provide loans.
- Some of the securities against which loans are provide include-
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- Demat Shares
- Mutual Funds Units
- Insurance Policies
- UTI Bonds
- NSC/KVP (In demat form only)
- Non Convertible Debentures
- NABARD bonds
- In times of need, you do not need to sell off your security in panic. You can get a loan if you pledge the securities. The bank will grant you an overdraft facility up to a value determined on the basis of the security pledged by you. A current account will be opened and you can withdraw money as and when you require. Interest will be charged only on the amount withdrawn and for the time span utilized.
- If you have a pledged your shares, the best part is that you can continue to enjoy all your shareholder benefits such as rights, dividends and bonuses and at the same time take advantage of price movements in the shares against which you have availed of a bank loan. For instance, Mr. Abhay has 100 demat shares of Axis Bank and price taken is Rs 1,200. Let us suppose the bank gives 50% funding against Axis Bank demat shares, the loan amount would be 50% of (1200*100) =Rs. 60000
- The eligible loan amount for each security category is based on several factors. For mutual funds, it typically would be 50% of the NAV, for shares in demat form; around 60%-65% of the script pledged is available as overdraft and for physical shares around 50%.
When should a loan against security best taken?
- This facility is best used to tide over your short term financing needs. The rate of interest is much lower than personal loans. The key advantage of LAS is the fact that you do not need to sell off the security to meet your financial needs.
- Gold loans
- Gold is an investment which generally lies idle at home or in the locker of a bank. You can make this asset liquid without selling it by taking a loan on it in times of need.
- A loan will be sanctioned on submission of all the required documents and satisfactory assessment of gold ornaments by the lender. Generally the lender will give you a loan to the extent of 80% of the value of the security i.e. gold you have provided. The lender retains the exposure to the market risk arising from movements in the market price of gold.
When should a Gold loan be taken?
- This loan is best accessed when the financial requirement is urgent (processing is quick) and is for a short tenure as the repayment has to be done within a year. The rate of interest is much lower than a personal loan because of the security provided. Also there is generally no pre-payment penalty levied.
Comparison of the various financing options
| Particulars | Personal Loan | Loan against property (LAP) | Loan against security | Gold loans |
| Meaning | Loan taken for personal use without any security | Loan taken by mortgaging the house | One time loan taken on securities which include shares, fixed deposits, insurance policies etc. | One time loan taken on gold |
| Loan Type | Unsecured | Secured | Secured | Secured |
| Tenure | 1 – 5 years | 3-15 years | 1 year | 3 -12 months |
| Interest Range | 14%-25% | 12%-17% | 12%-17% | 11.5%-15% |
| Processing charges | 1%-2% of the loan amount | 0.05% to 3% of the loan amount and is payable upfront | Around 2% of the loan amount | Around 2% of the loan amount |
| Pre-payment penalty | 2%-5% of the outstanding loan amount | 2% – 4% of the outstanding loan amount | Nil | Nil |
| Eligible loan amount | Dependent on monthly Income | 40%-60% of the value of the property | Dependent on the type of security. E.g. 50% of the value of equity shares | ~80% of the value of gold |
The urgency and the time period for which you may require finance will vary depending on the need. Assess the various loan options that are available keeping in mind the tenure, cost element and other features of the product. Make sure you use your assets in times of need. Access personal loans only if you’re left with no choice.