Understanding lease rental discounting loan

In the world of finance, businesses and property owners often seek ways to unlock cash flow without selling assets. One way to do this is through a Lease Rental Discounting (LRD) loan. This type of loan lets property owners use the future rental income from their property as collateral to get immediate funding. It is a great option for people who own rental properties and want to access cash quickly, without giving up ownership of their property. Read on to understand what Lease Rental Discounting loans are, how they work, their benefits, and the steps to apply for one.

What is a lease rental discounting loan?

A Lease Rental Discounting (LRD) loan is a type of secured loan that uses the future rental income from a leased property as collateral. Essentially, property owners can borrow money by showing the future income they expect from tenants, instead of selling the property or using other assets. The lender evaluates the property’s rental income and offers a loan based on the present value of those future rents. This allows property owners and businesses to access funds without having to sell or mortgage their property. It’s an ideal solution for those who have steady rental income but need cash for other purposes.

How does lease rental discounting work?

Lease Rental Discounting works by securing a loan against the future rental income of a leased property. Here is how it generally works:

Property and income evaluation: The lender assesses the property and checks the rental agreement in place. They calculate how much rental income the property generates and how long the lease is valid.

Loan amount determination: Based on the future rental income, the lender calculates the loan amount. Typically, the loan is around 70-80% of the value of the expected rental income.

Loan disbursement: Once everything is assessed, the loan is disbursed to the borrower. This can be a lump sum or instalments, depending on the agreement.

Repayment: The loan is repaid using the rental income the property generates. Payments are usually made monthly or quarterly, matching the rental payment cycle.

By using rental income as security, Lease Rental Discounting makes it easier for property owners to access funding quickly without the need to sell or give up control of their property.

Benefits of lease rental discounting loans

Access to funds without selling property: You do not need to sell your property to access cash; you can keep ownership while still borrowing money.

Lower interest rates: Since the loan is secured by property rental income, lenders often offer lower interest rates than unsecured loans.

Flexible repayment options: Repayments can be aligned with the rental payment cycle, so you don’t have to worry about monthly repayments outside your income flow.

Longer loan tenure: Lease Rental Discounting loans typically come with longer repayment periods, allowing borrowers more time to repay the loan.

No impact on business operations: Since you are using rental income as collateral, your business can continue without major disruptions.

Attractive for property owners: This type of loan is perfect for property owners who have steady rental income but need capital for expansion or other investments.

Eligibility criteria for lease rental discounting loans

Property ownership: The borrower must own a property that generates rental income.

Lease agreement in place: The property should have an active lease agreement with tenants who are paying rent regularly.

Steady rental income: The lender will assess whether the property generates a consistent income, making it more likely that loan repayments can be made.

Location of the property: Properties in prime or well-located areas are usually preferred because they offer more reliable and higher rental income.

Credit score: While the loan is secured by rental income, a good credit score may help in securing better loan terms.

Property condition: The property should be in good condition and not too old, as older properties may not generate enough steady rental income.

Documents required for lease rental discounting loan application

Proof of property ownership: Documents like the title deed or sale agreement to show that you own the property.

Lease agreement: A copy of the lease agreement outlining the rental amount, lease duration, and tenant details.

Property valuation report: A report by a certified appraiser to evaluate the property’s market value and rental potential.

Rental income proof: Documents like bank statements or rent receipts showing the rental income received from tenants.

Personal identification documents: Government-issued IDs such as Aadhaar card, PAN card, passport, or driver’s license.

Address proof: Utility bills, bank statements, or a government-issued document confirming your residential address.

Credit report: A recent credit report to show the borrower’s creditworthiness.

Interest rates and tenure options

Loan tenure	Interest rate range	Processing fee
1-5 Years	8% - 12%	1% - 2%
6-10 Years	7% - 10%	1.5% - 3%
11+ Years	6% - 9%	2% - 4%

Note: Interest rates and processing fees can vary depending on the lender, location, and specifics of the property.

Lease rental discounting vs. Traditional loans

Feature	Lease rental discounting	Traditional loans
Collateral	Future rental income from the property	Property, assets, or business
Loan amount	70-80% of expected rental income	Based on borrower’s financial health
Interest rates	Generally lower	Higher compared to secured loans
Repayment terms	Based on rental income cycle	Fixed EMIs based on loan terms
Eligibility	Property with leased rental income	Varies based on business/personal credit
Loan tenure	Long-term repayment options	Shorter repayment periods

Step-by-step guide to applying for a lease rental discounting loan

Check eligibility: Ensure your property generates steady rental income and meets all the lender's requirements.

Gather required documents: Collect necessary documents such as ownership proof, lease agreements, rental income proof, and identity documents.

Contact lenders: Research banks or financial institutions that offer Lease Rental Discounting loans and contact them for details.

Submit the loan application: Complete the application process, submitting all required documents for evaluation.

Property and income evaluation: The lender will assess your property’s value and rental income to determine the loan amount.

Review loan offer: Once the evaluation is complete, the lender will send you a loan offer detailing the loan amount, interest rate, and repayment terms.

Accept loan terms: After reviewing the offer, accept the loan terms and the lender will disburse the funds.

Repay loan: Repay the loan as per the agreed-upon terms, using your rental income.

Common uses of lease rental discounting loans

Business expansion: Use the loan funds to grow or expand your business operations.

Debt consolidation: Pay off high-interest loans or consolidate debts to simplify finances.

Property renovation: Use the loan to improve or renovate your property, which can increase its rental value.

Working capital: If you’re a business owner, use the loan as working capital for day-to-day operations.

Real estate investment: Invest in new properties or real estate projects, using the funds from the LRD loan.

Why loan against property is a better option?

A loan against property (LAP) can be more flexible than Lease Rental Discounting (LRD) because it does not depend on the future rental income of the property. With LAP, the borrower can use any type of property—commercial or residential—as collateral, even if it is not leased out, which offers more options. Furthermore, loan against property typically offers larger loan amounts and longer tenures since it is secured against the property’s market value. While Lease Rental Discounting loans are tied to the property's rental income, LAP provides the borrower with more freedom to use the loan for various purposes, not just based on rental income.

Conclusion

Lease Rental Discounting loans are a practical way for property owners to unlock the value of their rental income and access funds without selling or giving up ownership of their property. These loans offer lower interest rates, longer repayment periods, and flexible options for those who have steady rental income. The process is straightforward, requiring only proof of property ownership, rental income, and a lease agreement. Whether you need capital for business expansion or personal use, LRD loans provide an effective solution to meet your financial needs while continuing to earn from your property.