3 min
20-September-2024
Loan Against Property (LAP) is a secured loan that allows you to borrow money by mortgaging your residential or commercial property. It is a popular financing option because of its lower interest rates and flexible repayment options. With LAP, the loan amount is based on the market value of your property, making it a preferred choice for individuals seeking significant financial assistance. However, settling the loan before the completion of its tenure can help save on interest and ease financial burden. Whether you are looking to make prepayments, close the loan early, or better understand the penalties and settlement amounts involved, knowing the exact steps and calculations can greatly aid in making informed decisions. This guide walks you through settling your loan, understanding any penalties that may apply, and calculating the final settlement amount for a smooth closure of your Loan Against Property.
Steps to settle your LAP (Loan Against Property) before EMI payments
- Review the loan agreement: Carefully examine your LAP agreement to understand the terms, including prepayment options and penalties, if any.
- Assess your financial situation: Ensure you have sufficient funds available for early repayment or partial prepayments.
- Contact the lender: Reach out to your lender to discuss the process of prepayment or foreclosure, confirming any charges or fees applicable.
- Request a loan statement: Obtain a statement detailing the outstanding principal, interest, and other applicable charges.
- Calculate prepayment amount: Use this statement to calculate the exact amount needed for settlement, considering any applicable penalties.
- Confirm prepayment penalties: In some cases, lenders charge penalties for early settlement, which can vary based on the loan type and tenure.
- Submit a written request: Once the details are confirmed, submit a formal request to the lender to initiate the prepayment or settlement process.
- Make the payment: Pay the outstanding amount via cheque or digital transfer to settle the loan.
- Collect loan closure documents: Ensure you receive all necessary documents, including No Dues Certificate and property release papers.
Understanding early LAP settlement penalties
- Check loan agreement: Review your loan agreement to determine if any penalty is mentioned for early settlement.
- Fixed-rate vs floating-rate loans: Penalties may differ for fixed and floating interest rate loans. Generally, floating-rate loans have no penalties, while fixed-rate loans may incur a fee.
- Penalty percentage: The penalty for early settlement is usually calculated as a percentage of the outstanding loan amount. This can range from 1% to 4%, depending on the lender.
- Time of settlement: Penalties may vary based on when the settlement occurs. Settling the loan during the initial years often attracts higher penalties compared to later stages of the loan tenure.
- Lender-specific policies: Each lender has its own policy regarding prepayment penalties. It’s crucial to verify this with your lender before making a decision.
- Negotiation options: Some lenders may allow negotiation on the penalty amount, especially if you have a good repayment history.
- RBI guidelines: In some cases, regulations from the Reserve Bank of India may provide relief from penalties, especially for loans with floating rates or specific borrower categories.
- Confirm charges with lender: Always check with your lender for a final confirmation on the exact penalty amount before proceeding with early settlement.
Calculating the LAP settlement amount
- Outstanding principal amount: The most important component of the settlement amount is the remaining principal balance of your loan.
- Interest payable: Add any pending interest up to the date of settlement to the outstanding principal.
- Prepayment penalty: If applicable, calculate the prepayment penalty based on the loan agreement or lender's policy. This is usually a percentage of the outstanding amount.
- Unpaid fees or charges: Check for any unpaid processing fees, late payment charges, or other fees that may be added to the settlement amount.
- EMI dues: Include any pending EMIs that are yet to be cleared.
- Date of settlement: The settlement amount is time-sensitive and may vary depending on the exact date you choose to repay the loan.
- Loan statement: Use the loan statement provided by the lender as a reference for calculating the total settlement amount.
- Online calculators: Many lenders offer online tools to help you calculate the exact settlement amount, including penalties and fees.
- Double-check with lender: Once you have calculated the amount, verify it with your lender to avoid any discrepancies in the final payment.
Impact of early loan against property settlement on your credit score
- Positive impact: Settling your loan early can boost your credit score by demonstrating financial responsibility and reducing outstanding debt.
- Debt-to-income ratio: Early repayment lowers your overall debt, improving your debt-to-income ratio, which is a key factor in credit scoring.
- Full repayment record: Successfully closing the loan early creates a record of timely and complete repayment, which is viewed favourably by credit bureaus.
- Potential temporary dip: Some credit scores may show a minor temporary dip due to the closing of a long-standing credit account, but this typically recovers quickly.
- Frequency of closures: If you frequently close loans early, it may affect your credit mix, which could slightly impact your score.
- Lender report: Ensure the lender reports your loan closure to credit bureaus promptly for a timely update of your score.
