Secured Credit Options in India: Choosing Between Loan Against Property and Overdraft Facility
By Anupama Deshpande | Apr 16, 2023
When it comes to accessing financial resources, individuals and businesses in India have multiple options to choose from. Two popular modes of borrowing money are LAP (Loan Against Property) and Overdraft Facility. While both of these are secured forms of credit, there are some differences that borrowers need to be aware of.
Loan Against Property (LAP) is a type of secured loan where the borrower pledges his/her property as collateral to the lender. This property can be a residential or commercial property, land, or any other immovable asset. The lender evaluates the property's market value and extends a loan amount based on a percentage of its value. LAP is ideal for those who require a large sum of money and can offer their property as collateral. The loan can be used for various purposes such as business expansion, education, marriage, medical emergencies, or any other personal requirements.
On the other hand, an Overdraft (OD) Facility is a type of credit facility offered by banks where the borrower can withdraw funds up to a pre-determined limit. The borrower is charged interest only on the amount withdrawn and not on the entire limit. Overdraft facilities are often offered to businesses and individuals who have a good credit history and have regular cash flows. The funds can be withdrawn and deposited as and when required, making it a flexible option for borrowers.
Loan Against Property (LAP) Vs Overdraft (OD) Facility in India
Outlined below is the difference between Mortgage Loan vs Overdraft Loan Facility in a tabular form for your better understanding:
|Parameter||Loan Against Property (LAP)||Overdraft Facility|
|Definition||LAP is a type of secured loan that allows borrowers to avail of a loan by keeping their property as collateral.||Overdraft Facility is a type of credit facility that allows account holders to withdraw more money from their bank account than what they have deposited.|
|Nature of Loan||LAP is a term loan||Overdraft facility is a revolving line of credit|
|Purpose of Loan||LAP can be used for any purpose, including business expansion, debt consolidation, and education.||Overdraft facilities are generally used for short-term expenses, such as business operations, inventory purchase, or payment of bills.|
|Eligibility Criteria||The borrower must be an Indian citizen, have a regular source of income, and own a property. The property should also have a clear title.||The account holder must have a good credit score, regular income, and a good relationship with the bank.|
|Processing Time||LAP loan processing time is generally longer and can take up to 15-30 days.||Overdraft facilities are quicker to process and can be approved within a few days.|
|Interest Rates||LAP interest rates are generally lower as they are secured loans.||Overdraft facility interest rates are higher than LAP but lower than personal loans.|
|Loan Amount||Loan amount can range from INR 1 lakh to INR 10 crores depending on the value of the property.||Overdraft limit varies from bank to bank and is usually based on the customer's credit score, income, and relationship with the bank. The overdraft limit is typically a percentage of the customer's fixed deposit or savings account balance.|
|Loan Tenure||LAP loans can be repaid over a period of 10-20 years.||Overdraft facilities do not have any specific repayment tenure and can be used as and when required. However, the bank may ask for repayment at any time, and the account holder must keep the account active with regular transactions.|
|Collateral||The borrower has to pledge their property as collateral. The lender holds the right to auction the property in case of default.||No collateral is required for overdraft facilities, but banks may ask for collateral or guarantee for higher overdraft limits.|
|Prepayment Charges||Prepayment charges may apply if the borrower repays the loan before the due date.||No prepayment charges apply for overdraft facilities.|
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Pros and Cons of Loan Against Property (LAP) & Overdraft (OD) Facility in India
- Lower interest rates compared to unsecured loans such as personal loans and credit cards.
- Longer repayment tenure, ranging from 10 to 15 years.
- The borrower can continue to use the property even after pledging it as collateral.
- The loan amount can be as high as 60-70% of the property's market value.
Cons of Loan Against Property (LAP)
- Risk of losing the property in case of default in loan repayment.
- Lengthy documentation process and property valuation can take time.
- The property needs to be free of any encumbrances, and the title needs to be clear.
Pros of Overdraft (OD) Facility
- Flexibility to withdraw and deposit funds as and when required.
- Interest is charged only on the amount withdrawn, making it a cost-effective option.
- Easy to apply and get approved, especially for businesses with good credit history.
- Ideal for managing short-term cash flow requirements.
Cons of Overdraft (OD) Facility
- Higher interest rates compared to LAP.
- The borrower needs to maintain a good credit score and regular cash flows to be eligible.
- The credit limit may be lower compared to LAP.
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Wrap-up on Choosing Between Loan Against Property and Overdraft Facility in India
In conclusion, both LAP and Overdraft Facility are excellent options for individuals and businesses looking for secured forms of credit. While LAP offers a higher loan amount and longer repayment tenure, it comes with the risk of losing the pledged property in case of default. Overdraft Facility, on the other hand, offers flexibility and easy access to funds, but the interest rates may be higher. Both Loan Against Property and Overdraft Facility have their advantages and disadvantages, and individuals must choose based on their financial requirements. If they need a large amount of money and have a property to pledge as collateral, then LAP can be a good option. However, if they require a flexible credit line for short-term expenses, then an overdraft facility can be more suitable. It's important to weigh the pros and cons of both these options and choose the one that suits your needs and financial situation the best.Share This :
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