When funds are required for short periods to cover needs, overdraft loans allow account holders to withdraw more than their account balances by keeping assets like residential property as security. Traditional loans also provide financing options, but have longer approval procedures and fixed repayment plans.
This article explains significant differences between the two to assist readers in determining which loan method best suits individual situations. Key aspects covered are eligibility norms, interest rates charged, application timelines, the quantum of money available, paying back loan amounts, early closing policies, and overall appropriateness for specific financial needs. So, let’s get started:
Key Differences Between Overdraft Loan Against Property and Traditional Loans
Here are the differences between overdraft LAP and term loan:
1. Eligibility Norms
Applicants typically meet specific criteria to qualify for overdraft loans against real estate. Most banks and non-banking financial companies (NBFCs) approve salaried individuals or business owners aged between 21 and 65. Owning a residential property free from other encumbrances is also required. Some loan providers may also allow the use of commercial property as collateral. Policy regulations can, however, differ across banks and NBFCs.
On the other hand, the parameters for obtaining traditional loans are broadly similar but more stringent. Along with factors like applicant age, employment stability, and property ownership, financial institutions check credit reports, income levels, job continuity guarantees, business vintage, and existing debt burdens before sanctioning loans.
2. Interest Rates
Overdraft Against Property borrowing carries higher interest costs that accumulate daily only on the money used, not the full sanctioned amount. Rates are often tied to external benchmarks like the Marginal Cost of Funds-based Lending Rate (MCLR). Exact percentages charged can vary depending on the overdraft quantum and LTV ratio.
On the other hand, interest rates are lower for conventional loans. Equated Monthly Instalments (EMIs) seem affordable as interest is levied only on the disbursed portion. Both fixed and floating rates are offered under different schemes. Processing fees may apply during the initial documentation stages before receiving the loan amount.
3. Application Approval Timelines
The request procedure for overdraft loans against real estate is more straightforward. It involves basic Know Your Customer (KYC) submission, minimal property papers, and nominal credit checks. Once documents are in order, approval happens relatively faster, generally within one week after eligibility confirmation.
If you talk about traditional loans, significant paperwork such as previous tax returns, salary slips, bank statements, and property title documents is solicited from applicants intending to take out regular loans. Detailed scrutiny and verification procedures for successive credit appraisals, evaluations, technical assessments, etc, often take 2 to 3 weeks at minimum before loan approval.
4. Loan Amount
Sanctioned limits are typically lower than traditional financing, depending on the exact overdraft product, collateral property value, and risk considerations.
In traditional loans, higher loan amounts sanctioned under conventional methods can fund up to 90% of the value of the pledged property.
5. Repayment Structure
A key feature of overdraft loans against real estate is the absence of any set repayment schedule or fixed tenure. Account holders have flexibility in servicing interest payments, although overdraft principals need repayment when the due date approaches. Failing to do so can risk account closure actions.
For traditional loans, specific EMIs spanning 5 years to 30 years are mandated, depending upon the scheme and loan amount. Defaulting on instalments invites strict notices, and delayed payments accrue further interest charges. Following disciplined repayment is advised.
6. Foreclosure Policies
Overdraft loans against property can be closed at any time without added foreclosure fees. Entire dues are automatically debited from linked active accounts or the account holders' directly credited closing balance. Part-prepayments are also usually allowed.
Traditional loans contracted through conventional methodology levy prepayment penalties up to 5% of the outstanding principal if closed before tenure completion. Part-prepayments are either not possible or chargeable in certain loan products. Longer lock-ins may be needed to avoid foregoing such foreclosure charges.
7. Suitability of Loan Type
Opting for overdraft loans against real estate best suits when funds are required to bridge working capital gaps for shorter timeframes. The overdraft method offers convenience in sudden contingencies. Quick loan access and flexible repayment make this facility appropriate for temporary business or personal financing needs.
By contrast, traditional loans are more appropriate for major long-range capital expenses like acquiring property, machinery, or any asset. Such loans can finance bigger ticket purchases owing to higher sanction amounts and longer repayment tenures spanning decades. Conventional loans, hence, work for wholesale, well-planned finance.
Conclusion
Overdraft against property and traditional loans have complementary advantages based on eligibility criteria, interest cost, application procedures, loan amounts, repayment discipline, foreclosure flexibility, and loan suitability for specific financing needs. While overdraft loans offer faster access and flexible repayment, traditional loans offer structured instalments at lower rates for larger capital needs. Prospective applicants can clearly understand and evaluate this comparative background before deciding between the two borrowing methods. Tools and resources from lenders like Shriram Finance, such as eligibility and EMI calculators, can further help you assess which loan structure aligns best with your financial goals and repayment capacity.
