If you need money and own some property, then you can get a loan against property i.e. by mortgaging it with a bank. Banks typically lend anywhere between 40-60 percent of the property’s market value. Here, you have two choices – you can take the entire loan amount as a lump sum and repay in equated monthly installments (EMIs), or as an overdraft account.
An overdraft is a facility that allows you to withdraw more money than what you have in your bank account, subject to certain limits. In the case of loan against property (LAP), a large amount is sanctioned against a pledged collateral, namely an owned property.
Understanding the EMI facility in loan against property
The advantage of taking this property loan is that eligible applicants get high loan amounts with longer repayment tenures at affordable interest rates. You can use the loan for a variety of personal and business requirements, which include but are not limited to wedding in the family, renovation of house or office, or investment in business. This option is available with banks as well as housing finance companies offering LAP. If you opt for one and choose to repay in EMIs, you will have to pay the interest on the entire amount throughout the tenure of the loan. Therefore, it is advisable to choose the lump sum-EMI option, if: You do not expect any significant cash flows with which you can repay large chunks of the loan in the near future (since interest rates are higher for the overdraft option).
Understanding the overdraft option in loan against property
This seems pretty tempting compared to the EMI option, but there are some things you need to know. First, you have to pay interest only on the money you withdraw, till the time you repay it. Second, only banks give you the overdraft option, since housing finance companies do not have savings/current accounts for individuals. Also, banks may charge a higher processing fee on the loan if you want to take it as an overdraft, rather than as a lump sum. This is because you may or may not use the credit limit for a while; in which case, the bank will lose the interest it can earn on the amount you haven’t withdrawn. Besides, you will have to pay the processing fee every year in the case of overdrafts, but only once in the case of a lump sum loan. Overdrafts also attract a higher rate of interest (normally around 0.50 percent extra) compared to the installment option.
An example
Take a look at a situation where a borrower opts for both a loan against property (EMI) and overdraft. Suppose Mr. Kumar has mortgaged his house for a loan of Rs 10 lakh and opts for an overdraft on his existing account with the same bank. Now, if Mr. Kumar withdraws Rs 5 lakh, say on the 20th of the month, and repays Rs 3 lakh on the 28th of the month, he will have to pay interest on Rs 5 lakh only for eight days. After the 28th of the month, he needs to pay interest only on Rs 2 lakh, till the time he repays that amount.
Key differences
Now that we have more clarity on the two products in the mortgage sector, let us take a look at some of the major differences when it comes to loan against property and overdraft on loan against property:
Security
Loans are pledged against collateral, such as property owned by the borrower, while the credit line provided to you through the overdraft facility depends on the value of your collateral.
Interest rate
Both loans and overdrafts are secured loans but in the case of overdraft loans against property, lenders charge a higher rate of interest because of the flexible nature of the financial product. Loan against property usually attracts a slightly lower rate of interest.
Credit line
In loans, you can use the entire amount disbursed for major expenses, such as overseas education or working capital. In case of overdrafts, you can withdraw the amount in phases, so it becomes ideal for payments or expenses when done in installments.
Repayment
LAPs are repaid through a pre-decided schedule of EMI payments. In the case of overdraft, borrowers can deposit any amount without worrying about prepayment penalties.
Interest outflow
Borrowers pay interest on the entire loan amount disbursed into their accounts in case of loan against property. But when it comes to overdraft, you only pay interest on the loan amount utilized and not on the entire credit limit.
Two of the most well-known terms in the mortgage industry are loan against property and overdraft. While they may sound familiar, as a borrower you should know the meaning and functionalities of the financial products. ApnaPaisa offers the best deals on credit along with a seamless property loan application. Click here to know more.
