Loan structuring

Loan structuring

Various banks have been innovative in their offers of a loan against property. In the traditional sense, loan against property only represents a loan that will be available with the property as a security for the loan. However in order to make the product more attractive for a larger number of people, banks have introduced a few changes with the loan against property.

There are mainly two ways in which a loan against property is structured in the market. Various banks adopt one or both of these methods for the purpose of giving money as a loan against property and the borrower needs to check with the bank about the exact loan structuring. This will highlight the conditions of the loan and the manner in which the various conditions have to be followed in servicing the loan once the money has been received from the bank. The two ways in which the loan structuring in a loan against property is done are term offering and overdraft offering.

Term offering

Term offering is the traditional offering where the bank sanctions a particular amount to the borrower as the loan against the property. The amount of loan is determined by the value of the property and the margin as well as the requirement that is present for the funds. The amount is then sanctioned to the borrower that he/she can use as per his/her requirements. The interest will be calculated based on the figure of the loan disbursed and the repayment schedule for the loan against property is then worked out accordingly. The borrower will then repay the loan through monthly instalments as per the working and this will then complete the entire loan process.

Overdraft method

Overdraft is another way in which the loan can be given and operated. Here, once the loan against property is approved for a specific amount the entire figure does not have to be taken by the borrower. Rather the borrower has the option to choose the manner in which he/she actually wants to operate the account and use the overdraft amount available to him/her. This means that the money can be withdrawn as per the need and this also results in a saving of interest cost because the amount of interest will be based upon the overdraft amount withdrawn and the time for which it is used. At the same time, the borrower can keep making deposits into the account as per the convenience and this will go on to reduce the outstanding overdraft amount. This again saves on the interest cost because the borrower pays interest only on the overdrawn amount for the applicable time. On an overall basis, the borrower can use the money till the limit that has been sanctioned and the amount of the interest will be calculated at the interest rate decided upon based on the actual situation. There is also the facility to renew the overdraft limit at specific time intervals whereas in the term loan offering the loan limit remains the same for the entire duration of the loan against property.