What is Loan Against Property?
Loan Against Property (LAP) is a secured loan where you pledge your residential or commercial property as collateral to borrow money. It's different from a home loan because the borrowed amount is not used for purchasing property, but for any purpose you need.
LAP vs Home Loan: Key Differences
| Feature | Home Loan | LAP |
|---|---|---|
| Purpose | Purchase/construct property | Any purpose (business, education, etc.) |
| Interest Rate | 6-7.5% | 8-10% |
| Loan-to-Value (LTV) | 80-90% | 50-60% |
| Processing Time | 2-3 weeks | 7-10 days |
| Tax Benefits | Yes (Section 24, 80C) | Limited (interest only) |
| Flexibility | Limited to property purpose | High flexibility |
Eligibility Criteria for LAP
- Age: 21-60 years at maturity
- Income: Minimum monthly income ₹25,000-50,000 (varies by bank)
- Credit Score: Minimum 650-700
- Employment: Minimum 2-3 years employment stability
- Property: Clear title, 3-5 years old minimum, no litigation pending
- Debt-to-Income Ratio: Should not exceed 50%
Types of Properties Accepted
Banks accept LAP against:
- Residential apartments and independent houses
- Commercial properties and office spaces
- Shop/retail units
- Industrial buildings
- NOTE: Properties under construction generally not accepted
- NOTE: Agricultural land typically not accepted
Loan Amount and Tenure
- Maximum Loan Amount: ₹25-75 lakhs (varies by bank and property value)
- Loan-to-Value (LTV): 50-60% of property market value
- Minimum Tenure: 3-5 years
- Maximum Tenure: 20-25 years
Example Calculation:
- Property Value: ₹50 lakhs
- LTV Ratio: 60%
- Maximum Loan: ₹30 lakhs
- Interest Rate: 8.5% p.a.
- Tenure: 15 years
- Monthly EMI: ₹28,640
Interest Rates on LAP
LAP interest rates are typically higher than home loans because:
- Higher risk of default (funds used for any purpose)
- No tax benefits on interest
- Lower LTV ratio reduces bank security
- Rates vary: 7.5% - 10.5% depending on credit score and bank
Documentation Required for LAP
Property Documents:
- Latest property papers and title deed
- Sale deed copy
- Property tax receipts (2 years)
- Municipal records or Khata extract
Personal Documents:
- PAN card and Aadhaar
- Recent passport size photograph
- Salary slips (3-6 months)
- Bank statements (6-12 months)
- IT returns (2-3 years)
- Employment letter
Advantages of LAP
- Flexible Usage: Use funds for any purpose - business, education, medical, expansion
- Quick Approval: Faster than personal loans (7-10 days)
- Lower Interest: Lower than unsecured loans (personal loans at 10-12%)
- Higher Loan Amount: Can borrow significant amounts based on property value
- Easy Renewability: Can renew LAP on same property after repayment
- Tax on Interest: Limited tax deduction on interest (under some conditions)
Disadvantages of LAP
- Collateral Risk: Your property is at risk if you default
- Higher Rates: Interest rates higher than home loans
- Lower LTV: Can only borrow 50-60% of property value
- Limited Tax Benefits: No tax benefits on principal repayment (unlike home loans)
- Property Lock-in: Cannot sell property freely during loan tenure
- Processing Charges: 1-2% of loan amount as processing fees
LAP vs Personal Loan Comparison
| Aspect | LAP | Personal Loan |
|---|---|---|
| Security | Secured (property as collateral) | Unsecured (no collateral) |
| Interest Rate | 8-10% | 10-18% |
| Loan Amount | ₹5-75 lakhs | ₹50,000-25 lakhs |
| Processing Time | 7-10 days | 2-5 days |
| Risk | Property at risk | Credit score impact only |
Step-by-Step LAP Application Process
- Check Eligibility: Verify minimum income, credit score, property age
- Compare Banks: Get quotes from 2-3 banks for rates and terms
- Pre-Approval: Submit documents for pre-approval process
- Property Valuation: Bank sends valuer; property is assessed
- Loan Approval: Bank approves based on valuation and income
- Documentation: Sign legal documents and agreements
- Disbursement: Funds credited to your account within 2-3 working days
Tips for Better LAP Terms
- Improve Credit Score: Higher score can get 0.5-1% rate discount
- Increase Down Payment: Higher down payment signals lower risk
- Shorter Tenure: Shorter tenure might get slightly lower rates
- Lower LTV Request: Ask for lower amount (30-40% LTV) to negotiate better rates
- Loyalty Bonus: Existing customers may get rate discounts
- Compare Multiple Banks: Don't settle for first quote
LAP for Business Growth
Many entrepreneurs use LAP for:
- Starting or expanding business
- Purchasing equipment and machinery
- Working capital for business operations
- Inventory funding
Important Warnings
- Risk of Foreclosure: Failure to pay EMIs can lead to property auction
- Cannot Sell Property: Bank has lien on property; can't sell without clearance
- Insurance Requirement: Property insurance is mandatory
- Prepayment Penalties: Some banks charge 2-3% prepayment penalty
Conclusion
Loan Against Property is a good option if you have an owned property and need funds for any purpose at lower interest rates than personal loans. However, remember that your property is at risk if you default. Use our EMI calculator to compare different LAP scenarios before making a decision. Always compare offers from multiple banks and ensure you can comfortably pay the EMI from your monthly income.