Is your house a source of your secondary income? Are you looking for a way in which you can utilize it in an optimum manner? Then, here is a way that you can utilize your secondary income for another purpose. Lease Rental Discounting allows you to use your future rental flows to fund your present for the fulfillment of some other purposes.
Lease rental discounting is a loan that you can borrow from the bank in return of the future rental receipts you hold of your leased property. In the above process, you get the loan for the leased property, the tenant or the lessee is paying the repayment to the bank in the form of the installments till the time he holds the leased property. The loan is given to the lesser or the owner based on the discounted value of the rentals and the underlying property value
This seems to be much unexpected but, Yes! And you can utilize it. Businessmen generally take this loan to grow their business. The type of property must be a commercial one when you take into account this type of loan. So you all must be having the query that what is then Loan against Property (LAP)? Are these both the same?
Let us take a look at the various aspects of the Lease Rental Discounting and clarify the differences between Lease Rental Discounting and Loan against Property.
Features of Lease Rental Discounting
Firstly it has got an easy documentation when we compare it with the Loan against property. The documents required to opt for this type of loan are as follows:
- Lease agreement.
- The bank statement of previous six months.
- The last 2 years of Profit & loss account, balance sheet and the income tax returns.
- Documentation of establishment of entity, identity, and address proof.
- Property documents.
- Other details if asked by the relationship manager.
Thus any salaried person, professional or a self –employed person can go for this type of loan. Secondly, it has got high loan amounts i.e. the second feature of the Lease Rental Discounting. The third feature which comes into the LRD is it is a long term solution for your purposes. The maximum tenure that can be kept is 10 years. Also, it has got high access to the cash you can get 50-65 % of your property depending on the bank you choose. Lastly, the amount for which you can borrow is kept between the ranges of 15lacs- 10 crores. In case, if you fail to pay the amount, you need to keep your property as collateral for the bank. If the lessee does not pay then the property will be confiscated by the bank until the loan is fully cleared and paid.
Now, as everything in this world has got two sides to it i.e. positive and negative, let us take a look at both the sides of the lease rental discounting.
Advantages of the Lease Rental Discounting
The owner of the property does not make a payment to the bank but in return, the tenant of the property directly pays the bank the loan in the form of rent every month. So, there is a direct payment of the amount and less chaos is created.
The loan is obtained easier and faster as the owner or the borrower of the money does not have to pay back to the bank but the lessee does. So, the borrower is free from the issues regarding the credit from the bank.
The money secured in the loan process can be utilized to make further investments into other properties or to solve other purposes if any.
When compared to the unsecured loans, the LRD has a lower interest rate. The interest rate is lower because the amount of the loan given is determined on the rent to be collected in the lease period.
Through LRD you can expand your business quickly and without fewer issues.
Disadvantages of Lease Rental Discounting
When compared to loan against property, fewer funds can be generated in the LRD. In the case of loan against property the borrower is able to exploit the full value of the property but in LRD only 50-65% can be done.
If the lessee has a bad credit score then it becomes hard for the borrower to borrow the loan from the bank.
The borrower cannot sell the property unless and until the loan is fully paid off.
What are the differences between LAP and LRD?
Loan against property is the borrowing of loan against the property as collateral and getting higher funds against the loan. In the loan against the property, you can utilize the maximum amount of loan against the value of your property and can your business on the go. In the Lease Rental Discounting, you get only a certain amount of loan against the lease amount the lessee will pay.
Also, the loans provided by the banks can be of low EMI at the same time. In the lease rental discounting a certain amount is fixed while borrowing the loan. So, the amount of EMI cannot be altered. There is also a facility of the flexible payment in the loan against property
But, in the loan against property the borrower cannot determine the loan amount but the property determines the extent of the loan. In the lease rental discounting, the amount of the loan is more flexible and easy as it is determined by other variables.
Also, the market norms in the loan against property are stricter than the lease rental discounting. As the bank credits higher amount in the loan against the property it takes severe actions to get back the amount too. In the lease rental discounting, the amount is not so high so the market norms are a lower level. Lastly, in the LAP the lender is at the higher risk of return but in LRD the lessee is.