Many banks and other financial institutions in any country, offer you a loan against property. But what does this exactly mean? Does it mean that you get a large loan amount, but your property is pledged to the bank?
Well, the answer is yes. When small business owners try to avail of a loan against property, the major disadvantage of it is that all the rights over the mortgaged property are transferred to the lender.
Hence, if you require financial assistance and want to know more about Loan Against Property continue reading the article. In this article, we are going to explain the meaning of a loan against property and its major risks and disadvantages.
A Loan Against Property/loan against any commercial or residential property, or mortgage loan is a financial instrument that lets people use the value of their property by putting it up as collateral to avail funds from any lending institution.
A loan Against Property is a loan that offers substantial funding or a loan against residential property, which can be paid over a certain period. Some non-banking financial companies (NBFCs) also offer LAP with a specified repayment tenure.
Let us try to understand the features and disadvantages of a loan against property.
But before that, if you wish to seek any consultation regarding the loan, then do reach out to us.
(LAP) LOAN AGAINST PROPERTY Disadvantages and Risks
When any small business needs money to meet urgent needs, the first thing we think of is a loan. Some financial experts do suggest that a loan against property is one of the most secured loans and carries a lower interest rate compared to other options.
A borrower can avail of this facility by way of a mortgage of his immovable assets such as any residential, commercial, and industrial properties.
Since this loan is easily available as lenders feel safe and have margins from 30% to 50% on the property value, it is more in demand.
As the repayment of such loan tenure is longer, the installments are low as compared to other loans.
Risks and Disadvantages of Loan Against Property
- Low LTV (Loan to valuation)- As the working capital loan can be as high as 300% of property value, LAP is restricted from 50% to 70% of the total value of the property. This is because most businesses are forced to borrow unsecured business loans at a higher interest rate for additional business needs after borrowing LAP.
- Decreasing Working Capital – When sales in your business are on an increasing trend, it needs increasing working capital to cater to the huge demand and also to take care of extended credit to buyers. Since LAP keeps on decreasing, being repayable in nature, the borrower always faces a shortfall of working capital when the business is increasing.
- Huge Impact On Cash Flows – Unlike the working capital credit facility, there is no EMI repayment and you are required to pay the intersection only. LAP has EMI repayment. This EMIs create a huge impact on cash flows as they are recurring and the amount is higher as it comprises both principal and interest components.
- Cheapest but most expensive – you will be shocked to know that LAP is expensive even if the interest rate appears to be cheaper. In any LAP, the interest is charged on the whole amount borrowed throughout the tenure of the loan irrespective of the utilisation. In any business borrowing, the cash credit limit is highly advisable considering the fact that the loan is never utilized for 365 days 24/7. Therefore, when the interest in LAP is charged over the amount irrespective of its use, it becomes truly expensive.
If you are looking for any assistance in getting a Collateral free loan, do reach out to us, one of our financial consultants will help you understand the disadvantages of LAP in detail.