Personal Finance

Leverage your rent receipts

Nalinakanthi V | Updated on December 09, 2018 Published on December 09, 2018

You can consider a loan against rent receivables over a personal loan

Is the high interest rate on your personal loan burning a hole in your pocket? If you own a property which fetches rental income, loan against rent receivables is an option you can consider to reduce your interest burden. Being a secured loan, the interest on this loan type is lower than that of other unsecured loan categories such as personal loans.

Under the scheme, banks lend against the rental income received by an individual on residential as well as commercial property owned by him/her. The maximum quantum of loan varies across banks. The total loan amount eligible is calculated based on the rent receivable over the loan tenure and the resaleable value of the property.

While most banks lend up to 80 per cent of the value of the property or the rent receivable through the loan period, whichever is lower, there are others than lend higher. For instance, Federal Bank lends up to 90 per cent of the receivables over the duration of the loan. However, HDFC Bank has limited the maximum loan amount to 50 per cent of the property value. It also considers other parameters such as net rental income.

Banks decide the loan amount based on the credit score of the loan seeker and his/her monthly cashflows. IDBI Bank, for instance, calculates the quantum of loan eligible such that it can be repaid within the residual lease period or a maximum of 120 months, whichever is earlier.

The tenure of the loan also varies across banks; HDFC Bank, for instance, gives loan for 1-9 years. Federal Bank offers loans for a duration of up to 10 years.

The maximum loan amount under the scheme could also be capped. The limit, however, varies across banks. Federal Bank lends up to ₹20 crore, while IDBI Bank has capped the maximum loan amount at ₹10 crore. However, banks have the discretion to lend more depending on the individual case.

Cost

Since the loan is secured by a charge on the underlying property, the interest rate on this loan type is competitive and the cost is lower than a personal loan. Banks typically charge 1-3 per cent over the MCLR (Marginal Cost of Funds based Lending Rate).

Here again, the interest rate varies across banks and customers, at 9.75-10 per cent. However, in case of non-banking finance companies, the interest rate is much higher. Bajaj Finserv, for instance, charges 11 per cent on an average. However, the final cost depends on various factors including the tenant’s profile.

Factors that are considered while deciding on the interest rate include credit score of the customer and his/her repayment track record, pedigree of the lessee, and location of the property.

The cost of a loan against rent receivables is, however, lower than the spread on personal loans, which is 3-8 per cent.

In addition to the interest, customers will also have to bear a processing fee, which is 1-3 per cent of the loan value; this again varies across banks. IDBI Bank, for instance, charges 1 per cent of the loan value as processing fee.

In addition to the processing fee, customers have to pay for an independent valuation report, which is one of the inputs used to arrive at the loan value.

How to apply

A duly filled application form along with the requisite documents will have to be submitted to the bank. The documents that are to be furnished include identity proof, address proof, bank statement for the last six months (this should be the account to which the rent is credited). Original documents pertaining to the property, such as title deed, authorised building plan and original property and other relevant tax receipts are also have to be submitted.

In addition to these, the loan-seeking individual will have to submit the tenancy agreement signed by him/her and the tenant. Upon scrutiny of these documents, banks may ask for additional documents such as bank statement of the tenant to assess his/her repayment ability, if need be.

If you are looking to borrow for personal or business reasons, loan against rent receivables can help you get funds at a cost lower than personal loans, particularly for small businesses.

However, this being a secured loan, banks will have a charge on the property. Also, given that banks are open to negotiation on the interest rate, one is better off comparing the cost and benefit on both the loan types (personal and loan against rent receivables) before taking the final call.

The writer is an independent financial consultant

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