An overdraft facility is a credit agreement that allows a borrower to withdraw more money than what is available on their account. Such credit facilities are basically loans with a pre-sanctioned limit against mortgaged assets like houses, vacant plots, etc.
It is a facility utilized by several small and medium scale businesses as a quick way of securing funds to meet urgent cash crunches.
Agreements like the loan against property overdraft depend on an extensive framework based on prospective borrowers, their eligibility, the tenor of a particular credit account, and several other factors. Let’s take a look at what is the framework of an overdraft facility on a loan against property.
The framework of Overdraft in a Loan Against Property
Overdraft facility is similar to borrowing credit from a particular lender, and customers may have to seek approval to avail the overdraft facility on loan against property or any other type of credit.
Once an individual borrows above their approved credit limit, it shifts over to negative, and the facility is activated.
- Approved Limit – Overdraft on secured loans are approved above a predetermined limit. It usually varies between different financial institutions, along with the borrower’s credit history, repayment capability, the stability of income, liabilities, current assets, and similar factors.
- Rate of Interest – Interest is charged on the number of funds withdrawn over the existing limit of a mortgage loan. Usually, the rate of interest on overdraft varies from 12% to 15% annually. Moreover, the factors that affect a loan against a property’s interest rate are also likely to change the rate of interest of the borrowed funds from the overdraft facility.
- Co-Applicant on a Credit – Several financial institutions mandate at least one co-applicant when individuals apply for an overdraft facility. It lowers the risk of lending, as both individuals are responsible to repay the debt. Existing co-signer also reduces the EMI burden as the payment is divided between both the applicants.
- Repayment Capability – Repayment capability is another essential criteria when an individual applies for a loan against property overdraft. Lenders look for a low fixed obligation to income ratio, as it shows that a borrower has a higher repayment capability. Applying for an overdraft facility with a high FOIR is not recommended; it is also one of the things that should be avoided while applying for a loan against property.
- Repayments – Repayment of the amount availed with an overdraft facility is not made via Equated Monthly Instalments (EMIs). The amount can be repaid within the loan tenor in lump sum as well.
- Tenor – The repayment tenor of a mortgage loan overdraft usually varies between different financial institutions. Lenders usually allocate a short repayment tenor, ranging from 24 months to 36 months; however, they hold the provision to renew the same at a given interval as per their discretion.
Loan against property is a common form of secured advance, popular amongst many as it offers a substantial sum against affordable EMI and extended tenor. Moreover, the amount does not come with any end-usage restrictions, allowing a borrower to utilise the funds for any requirement.
There are several financial institutions including NBFCs that offer such property loans to eligible applicants. Moreover, they also offer top-up loans after loan against property balance transfer, which provides a substantial sum to borrowers to meet their financial requirements.
They also provide pre-approved offers on both secured and unsecured credits, helping a borrower save time and hassle during the repayment process. Pre-approved offers are available on home loans, personal loans, business loans, and several other financial products. You can check your pre-approved offers by sharing only some essential details online.
Overdraft facility is of great benefit for individuals who require substantial financing. Usually, self-employed individuals are the largest beneficiaries of this type of credits. Despite the added fees and charges, the features of such credit far outweigh the added burden and help a borrower fulfil their financial requirements.