An overdraft facility against property allows borrowers to access additional funds by pledging their property as collateral. This credit line can be used for a range of purposes, including managing cash flow gaps, business expenses, or personal financial requirements. This facility allows borrowers to withdraw money up to a sanctioned credit limit, paying interest only on the amount utilised. It is particularly useful for managing short-term cash flow requirements or business expenses.
However, overdraft loans against property generally carry higher interest rates than the base LAP, reflecting the increased risk to lenders. Therefore, it is essential to carefully evaluate the interest costs and repayment options before opting for an overdraft facility.
What Are the Typical Interest Rates for an LAP Overdraft?
Financial institutions usually charge higher interest rates for the overdraft portion of your LAP compared to the base loan. This is because an overdraft is seen as a relatively riskier form of lending.
● The interest rate on the sanctioned overdraft limit is generally 2-3% higher than your LAP base rate.
● This rate applies only to the overdraft amount you have utilised, not to the entire sanctioned limit.
● Interest is calculated daily and charged monthly
For example, if your loan against property overdraft base rate is 16% p.a. and the loan provider offers a 2% premium on overdraft utilisation, you will be charged interest at 18% p.a. on the overdraft amount.
Key Factors That Impact LAP Overdraft Interest Rates
The specific interest rate offered to you would depend on factors like:
● Your credit score and income stability
● The loan-to-value ratio on your property
● Your relationship with the financial institution
● Whether you have other accounts or loans with the same financial institution
A strong credit profile and a history of timely repayments may help you access more competitive interest rates. Maintaining a positive relationship with your financial institution can also be beneficial.
Evaluate Your Repayment Capabilities Before Opting for an Overdraft
Since overdraft loans are more expensive, you should assess your income streams and cash flows to determine if you can service the higher interest obligation. Check if your finances allow you to:
● Repay only interest: You pay the accrued interest every month while keeping the overdraft principal amount constant.
● Repay over longer tenures: Instead of 12-18 months, you can request the loan provider to allow flexible repayment for LAP overdraft over 36-48 months, reducing the equated monthly instalment (EMI) burden.
● Prepay without charges: Most financial institutions allow part or full overdraft repayment without imposing any prepayment penalties. This helps save on interest costs if funds improve.
Discuss Flexible Property Overdraft Loan Repayment Options With Your Lender
Every borrower has a unique financial situation. Responsible loan providers realise this and do their best to accommodate reasonable requests for repayment flexibility on a loan against property overdraft. Hence, have an open conversation with your financial institution to understand the available options before committing to an overdraft.
● Ask about stepping up your repayments once cash flows improve, rather than paying a constant EMI throughout the overdraft tenure.
● Check if top-up loans can allow you longer repayment periods through tenure extension on your base LAP.
The RBI has also advised financial institutions to offer relief packages to borrowers facing temporary cash crunch issues. So, highlight any repayment challenges you foresee and request lenders to provide moratoriums or easier repayment options if possible.
Make Sure You Read the Fine Print!
While the flexibility and convenience of an LAP overdraft facility can be useful, the higher interest rates can negatively impact your finances if not managed prudently. Read all terms and conditions about interest levies, prepayment options, and the lender's right to recall the overdraft before you decide to avail of this facility. Proper due diligence helps prevent surprises or payment issues at a later stage.
Conclusion
Availing an overdraft against your home loan or LAP can help meet urgent or additional financing needs. However, you need to be cautious with your repayment planning due to the higher interest rates charged on overdraft facilities.
Carefully evaluate your cash flows, budgets, income stability and risk appetite before deciding to take on the weight of increased interest obligations. Have clarity on available repayment structures so that you can choose an option that best suits your finances.
If you have a loan against property with Shriram Finance, reach out if you anticipate any repayment issues or challenges. Manage your finances wisely and have a disciplined borrowing habit. This way you can make the most of LAP overdrafts while minimising risks such as delayed repayments or increased interest costs.
