Unknown facts about LAP
Property is generally among the first assets people acquire. But, compared to other assets like, say, stocks, it's relatively illiquid, and poses a bit of a problem when quick cash is needed. The solution to this is Loans against Property (LAP) offered by many financial institutions.
The borrowers in this segment hold great potential. Let's see, how?
Your ideal customers for this product (Loan against Property) are existing home loan customers who have been paying EMI's for more than 3 years. These customers can avail LAP for their personal or commercial needs at a lower interest rate as compared to business loan, personal loan or credit cards. Moreover an unsecured loan is expensive by at least 4 - 5%. This way existing home loan customer has an edge over others who have the same need for a loan.
Not only this, the LAP is provided against the home for which your customer is already paying the EMI. Banks decide the loan eligibility on appreciation value of the home. But the threshold amount too is generally defined by most lending institutions like say, minimum Rs. 25000 and maximum Rs. 1.5 crore.
You being in the business of marketing of loan products would find LAP an attractive proposition due its unique features.
You can share with your customers that this is an all purpose loan, i.e., the loan can be obtained for any purpose whatsoever. If amount of loan is Rs.25 lakh and above then purpose of loan will have to be specified along with an undertaking that loan will not be used for any speculative purpose whatever including speculation on real estate and equity shares.
You must be aware that banks do not lend the full value of the property. One can get only a certain percentage of the value of the property (40% to 60%) or between two and two-and-a-half times the current income, whichever is lower.
Banks also treat salaried or self-employed differently; banks take into account the number of years he has remained in service/profession. The proof of income for salaried individuals is different from that of self-employed individuals. Salaried people need to submit their latest salary slip, Form 16 (along with salary certificate from the employer), and their bank statement for the last 3 months. Self-employed people need to provide their IT returns for the last 2 years, balance sheet, and profit & loss account, bank statements for the last 6 months as proof of income.
Also the lender evaluates your customer's repayment capacity based on his income, savings, and debt obligations, other than household expenses. Based on this information the lender decides on the amount of loan that he is eligible, after considering his previous debts and obligations.
In a nutshell, loan against property is a secured loan against an asset.
Remember proof of income is one of the most important factors considered by any lender even if one is mortgaging his most expensive/ important asset. Reason?
The answer lies in the illiquid nature of property. It's not easy for the bank to sell the house to recover the loan, if he defaults. As property is not a standard product, its price may vary from area to area and with time. Also, banks will not find it easy to evict existing occupants from the house to sell it.
Therefore, banks prefer that customer pays back the loan from his income stream and not by selling the security - that is, the house. Thus, there is a need to submit the income proof when a person is applying for LAP.