It is a big question if we can take a loan on leased property. Only a few people know that they can take a loan against their leased property as well. A loan against a leased property is a type of loan where the borrower uses the leasehold rights of a property as collateral to obtain a loan from a lender. When a property is leased, the lessee (the person who leases the property) has the right to use and occupy the property for a certain period of time, usually for a fixed number of years, however, the lessor (the person who owns the property) retains the ownership of the property.
Eligibility Criteria for Loan Against Leased Property
The eligibility criteria for a loan against a leased property may vary depending on the lender and the specific terms of the loan. However, here are some general requirements that most lenders consider:
Types of Leased Properties Eligible for a Loan
Some common types of leased properties that are eligible for a loan are:
- Commercial properties: Commercial properties are the best-leased properties to get a loan. These may include shops, offices, warehouses, factories, and other commercial spaces that are leased out to businesses.
- Residential properties: Many people procure loans against their residential leased properties as well including apartments, condominiums, townhouses, and other residential units that are leased out to tenants.
- Industrial properties: These may include land, buildings, or other facilities that are leased out to industrial tenants.
- Hospitality properties: Such kinds of properties as hotels, motels, resorts, and other hospitality properties are leased out to guests.
The property’s age is the most important factor that decided whether the loan will be granted or not. Usually, loans are not given on very old structured leased properties.
The property's value will be assessed by the lender to determine the loan amount that can be offered.
The borrower must have a valid lease agreement in place with the lessor, and it should be in force for a minimum specified period. The period also decides the grant of the loan. Further, to be eligible for the loan the borrower should have exclusive rights to use the property as per the terms of the lease agreement.
The lender will evaluate the borrower's creditworthiness, income, and financial stability to ensure the borrower can repay the loan.
Here are some common documents that may be required by the lender:
- Identity proof like a PAN card, Aadhaar card, passport, or any other government-issued identity proof.
- Address proof like a utility bill, bank statement, rental agreement, or any other document that verifies the borrower's address.
- Lease agreement: The borrower needs to provide a copy of the lease agreement with the lessor.
- Property documents like a copy of the property's lease deed, a title deed, and other relevant documents that establish the ownership of the property.
- Income proof like salary slips, bank statements, income tax returns, or any other document that verifies the borrower's income.
- Business documents: If the loan is for a business purpose, the borrower may need to provide business documents such as financial statements, tax returns, and business registration documents.
- Bank statements: The borrower may need to provide bank statements for the last 6 to 12 months.
- Property valuation report: The lender may require a property valuation report to determine the value of the leased property.
- NOC from the lessor: The borrower may need to obtain a No Objection Certificate (NOC) from the lessor, giving consent for the property to be used as collateral for the loan.
- Firstly, the lender will determine the eligibility of the applicant for a loan against leased property by reviewing the lender's eligibility criteria and if eligible, the borrower will fill out the loan application form and submit it along with the required documents to the lender.
- The lender will conduct a property valuation to determine the value of the leased property and check the borrower's credit history to determine their creditworthiness. Based on the property valuation and credit check, the lender will make a loan offer, including the loan amount, interest rate, and repayment terms. If the borrower agrees to the loan offer, they will need to sign the loan agreement and other documents as required by the lender.
- Once the loan agreement is signed, the lender will disburse the loan amount to the borrower's account. The borrower will need to make repayments according to the agreed-upon schedule. Failure to do so may result in penalties or other consequences as specified in the loan agreement.
It's important to note that the process may differ from lender to lender and can depend on the specific terms of the loan. Borrowers should consult with the lender to understand the specific loan process and requirements for a loan against a leased property.
Advantages and Disadvantages
- Access to Funds: A loan against a leased property provides immediate access to funds, which can be useful for personal or business needs.
- Lower Interest Rates: The interest rates for a loan against a leased property are typically lower than those for an unsecured loan since the property serves as collateral.
- Longer Repayment Tenure: The repayment tenure for a loan against leased property is usually longer than that for an unsecured loan, which can make the monthly payments more affordable.
- No Need for Ownership: Borrowers can get a loan against a leased property without being the owner of the property, as long as they have a lease agreement with the lessor.
- Risk of Losing the Property: If the borrower defaults on the loan, the lender can take possession of the leased property, which can result in the loss of the property.
- Limited Loan Amount: The loan amount for a loan against a leased property is typically limited to a certain percentage of the property's value, which may not be enough for some borrowers' needs.
- Lengthy Documentation: The documentation requirements for a loan against a leased property can be extensive and time-consuming, which can be a disadvantage for borrowers who need funds quickly.
- Restrictions on Property Usage: The lease agreement may contain restrictions on the usage of the property, which can limit the borrower's ability to use the property as collateral for the loan.
A loan against a leased property can be a useful option for borrowers who need access to funds and have a lease agreement with a lessor. It provides lower interest rates, longer repayment tenures, and immediate access to funds. However, borrowers should also consider the risks involved, such as the possibility of losing the leased property if they default on the loan. Additionally, the lengthy documentation process and restrictions on property usage can also be a demerit. Ultimately, borrowers should carefully weigh the pros and cons and consult with the lender to determine if a loan against a leased property is the right choice for their specific needs and circumstances.