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Posted On: 26-Apr-2010

Loan Against Property (LAP) - Basics You Must Know

Did you know that if you already own a property, you can take a loan against that property (LAP)? These funds can then be used for a variety of purposes. Here we explain the basics of LAP.

What is LAP?

LAP is a useful way of raising cash. If you are in need of funds and own property, you can leverage this property to create these funds, without being forced to rent out the property, or sell it. You can raise a loan against this property by proving your ownership of the property. Such a loan is called a LAP loan. LAP is a secured loan - you are offering your property as a security to the lender, and in case you default, the lender can have recourse to your property. LAP can be particularly useful for self-employed persons who own their own home, and might not have a regular source of salary income.

Basic features of LAP are:

  • Loan amount: Typically, you can qualify for an amount up to 60% of the market value of the property.
  • Type of property: LAP is usually given only against a residential property, but some lenders provide loans against commercial properties as well.
  • EMI-based loan or Overdraft facility: You can either borrow the full loan amount and then pay an EMI towards it. Or, you can avail of an overdraft facility for a self-occupied house whereby you are charged interest only on the drawn down amount of the overdraft facility.

Difference between LAP and Home Loan

Both are loans related to residential properties, but there are differences between LAP and Home Loan.

Loan Against Property Home Loan
You can use funds from a LAP for any purpose. A home loan has to be taken only to purchase a house.
The tenure for LAP is about 10 to 15 years. The tenure for a home loan can go up to 25 to 30 years.
The rate of interest for LAP ranges from 12% to 14%. (As of April 2010) The rate of interest for a home loan ranges from 8.5% to 10%. (As of April 2010)

What purposes can you take a LAP for?

LAP is one of the most common all purpose loans - there are usually no end-use restrictions. You can use the loan proceeds for a variety of financial needs. Some of these are:

  • Financing your business
  • Wedding expenses
  • Funding children's education
  • Paying for a medical emergency
  • Renovation of your house

In this regard, LAP is like a personal loan which can also be used for any purpose. However, there are significant differences between these two types of loans.

Difference between LAP and Personal Loan

Loan Against Property Personal Loan
These are secured loans – you have to provide your house as a security. These are unsecured loans – you do not have to provide any security.
The rate of interest for LAP ranges from 12% to 14%. (As of April 2010) The rate of interest for a personal loan starts at 15%, but can go up to 30%. (As of April 2010)
Loan eligibility is primarily determined by the value of the property. Loan eligibility is determined by your income and credit record, and loan repayment capacity.
Loan tenure for LAP is up to 15 years. Maximum loan tenure for a personal loan is up to 5 years.

What are the eligibility criteria to get LAP?

The factors that determine your eligibility for LAP can vary from lender to lender. Some common factors that a lender uses to decide your eligibility are:

  • Your income, age, financial dependants, occupation, assets and liabilities
  • Market value of the property
  • Legal certainty that the property belongs to you, and is unencumbered
  • Your repayment track record of existing loans and savings habit
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