LAPs are secured loans that are disbursed against the collateral of your property, either residential or commercial. Like in the case of a personal loan, LAPs are usually used by individuals with sudden requirements for substantial capital, for instance expansion of businesses or large one-time expenses like weddings, medical procedures or education.
Depending on the quality and potential of the property, a bank evaluates the applicant’s credit profile and ability to repay to determine the loan amount and payment schedule.
Since these loans are secured by property assets, they tend to be at far lower interest rates than comparable unsecured loans like personal loans. They are also very flexible, in that they can be used for a wide range of expenditures, from business to personal. This is in contrast with a home loan that can only be used to finance the purchase of a home, though in principle both these loans are collateralized by the property asset.
An LAP applicant can continue to occupy the property over the duration of the loan as long as payment schedules are adhered to, and the loan can even be topped-up without fresh appraisal of property and process documentation.
The primary determinant of your LAP loan amount is the fair market value of your property basis a fresh appraisal done by the lender, independent of present or future value.
Banks, housing finance companies and NBFCs tend to disburse a loan amount that is 60% of the market value of the property, contingent on the fact that the property has clear and marketable titles, and all other documentation are in place.
There are three big factors to take into consideration while settling on the total interest payments for your loan. First, the property valuation and ownership of property represent the primary risk assessment for the bank. Any issues with this appraisal will impact the eligibility and interest rate on your loan. Second, your capacity to repay will be taken into account by the lender. This encompasses factors like your credit history, outstanding loans, presence of a co-applicant, current income, history of employment etc.
Finally, your preference for tenure will impact your interest payments. LAPs are more flexible than personal loans and can have tenures ranging from 12 months to as many as 20 years. So a longer tenure will reduce your EMIs but potentially increase your total interest payments, especially if discount rates in the market are quite high.
Answers to these questions tend to be needlessly complex, when there is only one metric you need to optimize: the present value of all your interest payments, that is, the time-discounted value of your total interest payment. To explain this, let’s take 3 simple cases. First, if you suddenly have excess liquidity or capital on your hands, and your alternate investment opportunities yield low returns, then you should consider a pre-payment of your loan to reduce your outstanding principal. If your LAP interest rate is high, you should additionally reduce the tenure of your loan.
These 2 actions will reduce the total interest payments you will make and save you a lot of money. Second, if your cash flows have increased, perhaps through a salary raise, and your LAP interest rate is higher than market returns, then you would save money by channeling your cash flows into paying off your loan faster through higher EMIs over a reduced tenure. If market returns are higher than your LAP interest rate, then you would make more money by instead investing your increased cash flow through SIPs. Third, if the LAP interest rates in the market fall, then you would save a lot of money by refinancing your loan and doing a balance transfer of your outstanding principal amount.