A collateral is a type of loan facility that allows you to borrow money from a bank or a non-banking financial institution (NBFC) by mortgaging your property as security. It is a secured loan, which means that if you fail to pay-off the debt, the lender can dispose off your asset to recoup the borrowing sum.

 

LAP can be used for various personal or business purposes, such as home renovation, education, weddings, medical emergencies, business expansion, debt consolidation, etc. However, before you apply for this loan, you need to understand some important terminologies related to this loan product. Here are some.

 

Collateral Loan Terminologies to Be Aware Of

 

Amortisation Schedule

This table shows the EMI’s breakdown into the principal and interest portion and the outstanding loan balance for each month of the loan tenure. The amortization schedule helps the collateral loan borrower track repayment progress and plan the repayment.

 

Prepayment

Prepayment is the act of repaying the housing finance partially or fully before the end of the loan tenure. Prepayment can help the borrower save on interest costs and reduce the loan burden. However, some lending institutions may levy a prepayment penalty for early repayment of the loan, per the terms and conditions of the loan agreement.

 

Foreclosure

This is the act of repaying the loan in full before the end of the loan tenure. It is a type of prepayment, but it involves closing the loan account. Foreclosure can also help the borrower save on the interest cost and release the property from the mortgage. However, some lenders may charge a foreclosure penalty for early closing of the loan, as per the terms and conditions of the loan agreement.

 

Balance Transfer

This is transferring the outstanding loan amount from one lender to another, who offers a lower interest rate or better terms and conditions. Balance transfer can help the borrower reduce the EMI and the loan’s interest cost. However, some lenders may charge a balance transfer fee for shifting the loan, as per the terms and conditions of the loan agreement.

 

Top-up Loan

This is an additional loan that the borrower can avail from the same lender over and above the existing LAP. The top-up loan is based on the current property value and the borrower’s repayment capacity. The borrower can use the top-up loan for any personal or business purpose.

 

Overdraft Facility

This flexible loan facility allows the borrower to withdraw and repay funds from the loan account as per the borrower’s requirement. The overdraft facility has a sanctioned limit based on the property value and the borrower’s profile. The borrower must pay interest only on the amount utilised, not the entire sanctioned limit. The overdraft facility can be used for personal or business purposes, per the borrower’s discretion.

 

Credit Score

This is a numerical representation of the borrower’s creditworthiness based on the borrower’s credit history, repayment behaviour, credit mix, credit utilisation, etc. The credit score runs between 300 and 900, with higher scores indicating better creditworthiness. It is one of the key factors that the lender considers while approving or rejecting the LAP application, as well as determining the interest rate and the loan amount.

 

Processing Fee

This is a one-time expense that the borrower must pay the lender for processing the LAP application. The processing fee covers the cost of verification, valuation, documentation, etc. The processing charge is typically a percentage of the borrowing sum, subject to a minimum and a maximum amount. The processing fee is non-refundable, even if the loan application is rejected or withdrawn.

 

Legal Fee

This is a fee that the borrower pays to the lender for conducting legal due diligence on the property and the borrower. The legal fee covers verifying the title deeds, ownership documents, encumbrance certificates, etc. It is usually a fixed amount and is refundable if the loan application is rejected due to legal issues.

 

Technical Fee

This is a fee that the borrower must pay the lender for conducting the technical evaluation of the property. The technical fee covers the cost of assessing the property’s physical condition, quality, age, location, and marketability. The technical fee is usually a fixed amount and is refundable if the loan application is rejected due to technical issues.

 

Stamp Duty

This is a tax that the borrower has to pay to the government for registering the mortgage deed of the property. The stamp duty is a percentage of the loan amount or the property value.

 

Conclusion

 

Knowing the key terminologies associated with collateral loans helps you grasp your loan agreement better. It also assists you in negotiating a better deal with your lender.