A Loan Against Property (LAP) is a powerful financial tool that allows individuals and businesses to access funds by using their property as collateral. While the concept might seem straightforward, it’s essential to understand the key terms involved to make an informed decision and maximize the benefits. This blog will break down some important terms you should know when considering a Loan Against Property with Suvidha Finance.

1. Collateral

Collateral is an asset you pledge to the lender as security for the loan. In the case of a Loan Against Property, your residential or commercial property serves as the collateral. If you fail to repay the loan, the lender has the right to seize and sell the property to recover the outstanding amount.

2. Loan-to-Value (LTV) Ratio

The Loan-to-Value (LTV) ratio refers to the percentage of the property’s market value that the lender is willing to offer as a loan. For example, if your property is valued at ₹1 crore and the LTV ratio is 60%, you may be eligible for a loan of ₹60 lakh. The LTV ratio varies between lenders and is influenced by factors like property type, location, and the borrower’s creditworthiness.

3. Interest Rate

The interest rate is the percentage charged by the lender on the principal loan amount. It can be either fixed or floating. A fixed interest rate remains constant throughout the loan tenure, while a floating interest rate fluctuates based on market conditions. It’s crucial to compare rates across lenders to secure the best deal.

4. Tenure

Tenure refers to the duration of the loan repayment period. Loan Against Property tenures typically range from 5 to 15 years, depending on the lender. A longer tenure means lower monthly installments (EMIs) but higher overall interest costs, while a shorter tenure means higher EMIs but lower interest expenses.

5. Equated Monthly Installment (EMI)

EMI is the fixed monthly payment you make toward repaying the loan. It includes both the principal and interest components. The EMI amount is influenced by factors such as loan amount, interest rate, and tenure. Proper EMI planning is crucial to avoid financial strain during repayment.

6. Processing Fee

A processing fee is a one-time fee charged by the lender to cover the administrative costs of processing your loan application. It is usually a small percentage of the loan amount. Make sure to account for this fee when calculating the overall cost of your loan.

7. Prepayment Charges

If you wish to repay the loan before the end of the tenure, you may incur prepayment or foreclosure charges. These fees vary between lenders and depend on whether your loan is on a fixed or floating interest rate. Some lenders offer prepayment without any penalty, so it’s wise to check the terms before applying.

8. Top-up Loan

A top-up loan is an additional loan that you can take over your existing Loan Against Property. This feature is useful if you need more funds during the loan tenure. Top-up loans generally come with competitive interest rates and flexible terms.

9. Property Valuation

Before approving your loan, the lender will conduct a property valuation to assess its market value. This valuation helps determine your eligibility and the maximum loan amount you can receive. The valuation process considers factors like property location, age, condition, and demand in the market.

10. Default

Default occurs when the borrower fails to make timely EMI payments. If you default on a Loan Against Property, the lender has the right to auction your property to recover the outstanding dues. Defaulting can also severely affect your credit score, making it harder to secure loans in the future.