What Is Working Capital Loan?
A working capital loan is a great way of meeting your financial needs without unnecessarily straining your finances. And the different types of working capital loans give you the flexibility of tenure, interest rates, repayment options, and loan collaterals. A loan Against Property (LAP) is a working capital loan that can help you finance your everyday operations or handle any unexpected expenses. And you can avail of the loan by keeping your residential or commercial property as collateral.
One of the main things you need to consider before applying for a loan against property is the value of your property and research which financial institution can give you the best deal. Additionally, here are six rules for you to follow when taking a LAP to make sure the loan works for you:
Borrow What You Can Comfortably Repay
It can be tempting to borrow a huge sum of money against your property. But you need to consider the loan-to-income ratio to avoid losing a lot of your income to the EMIs to focus on other critical financial goals. Make sure your EMI does not exceed 50% of your monthly income to get the full benefits of LAP.
Opt for a Short Loan Tenure
EMI and loan tenure have an inverse relationship. The longer the tenure, the lower the EMI, and vice versa. So, it can be alluring to go for a long tenure to keep the EMI low and maintain a healthy loan-to-income ratio. But you need to keep in mind that even with a lower EMI, you end up paying more in interest when the loan tenure is long. So keep the loan tenure as short as possible while keeping the EMI manageable with your monthly income.
Ensure Timely and Regular Repayments
Similar to any other loan you may avail of, the most important rule is to make regular and timely repayments against the LAP. Being disciplined in your repayments is a great way to organise your finances and avoid any late fees or charges the bank may impose for a missed EMI. Additionally, missed or late EMI also affects your credit score and will appear in your credit report when you try to avail of another loan in the future, affecting your probability of loan approval. So, to keep your credit score high and avoid any late fees, ensure you are making timely and regular payments.
Avail of Insurance with Big-Ticket Loans
A mortgage loan or LAP means going into debt long-term. In such cases, the recommendation is to buy a term insurance plan for the borrower or the primary breadwinner to make sure other family members do not suffer any financial hardships in case of a tragic event.
Don’t Splurge with or Invest the Loan Amount
Using the loan amount to splurge on things like unnecessary luxuries or long vacations can pull you into a debt trap. Additionally, high-yielding investments are often volatile. And if you use the loan money to invest in high-yield plans and market conditions become unfavourable, you will not only lose money but be strapped for cash to pay back the EMI. So, use your LAP amount on value-added things like skill upgradation and business expansion or emergencies instead of investing it with the hopes of higher returns or splurging on luxuries.
Read the Finer Points
Reading the finer points of terms and conditions can protect you from any nasty surprises down the line. The fine print of the loan agreement can include hidden charges or processing fees for the LAP. This can lead to an overall higher cost of borrowing with the additional charges. Reading the finer points helps you be informed and avoid any regrets in the future.
A loan against property is a secure type of working capital loan that can help you finance your needs without putting unnecessary strain on your finances. Knowing the value of your property and researching lenders is the key to getting the best deal when borrowing against your commercial or residential property. Just keeping a few things in mind, like maintaining a loan-to-income ratio, opting for a short tenure, making regular payments, availing insurance, using the loan amount for the right purposes and reading the finer points can help you leverage the LAP and making it work for you.
Electronica Finance Ltd LAP can help you access money when you need it the most. With a maximum loan amount of up to Rs. 3 crore and flexible repayment over a tenure of up to 7 years, you can raise cash for your business – quickly and easily – against your commercial property. EFL’s loan against property for MSMEs, and start-ups is a simple, quick and transparent process and with flexible access to credit, EFL can help you cater to your business needs and be a partner in your business journey.