Commercial property loans are credit options that lenders offer against non-residential or commercial properties. They are used to run businesses or other commercial enterprises. These loans can be used to purchase commercial real estate. In addition, one can use these loans for all purposes, such as expanding your business, wedding or education financing, etc.
Consequently, a loan against commercial property can be a favourable option for someone who needs credit at a short notice. So, before opting for one, a borrower must understand its key features and aspects.
How does commercial property loan work?
A commercial property loan is a finance option type where the loan seeker pledges their non-residential commercial property to secure credit. These commercial properties may include under-construction office space, ready-to-use buildings, etc.
Lenders will offer a loan amount based on the market value of the property, according to the loan-to-value ratio. Loan against commercial property are thus flexible credit options offering economical rates and extended tenors to borrowers.
Things to understand before applying for a loan against commercial property
Several features factor into the process and functioning of commercial property loans. Some of the key aspects are as follows:
Loan-to-value ratio (LTV)
Loan to value ratio refers to the portion of the pledged property’s market value ratio that the borrower can get as credit. Generally, the percentage averages around 55% in commercial properties, the LTV ratio of commercial real estate being much lower than that of residential property.
A loan against commercial property is a kind of mortgage loan where the lender uses their commercial assets such as office space, grocery store, manufacturing building, etc. as collateral to secure a substantial credit.
Loan foreclosure refers to repaying the outstanding loan amount in a lump sum in advance before the loan tenor ends. Therefore, if a borrower has surplus funds in hand, they can use it to clear off the repayment at once instead of paying regular EMIs.
Moreover, with prepayments, the principal credit amount gets reduced, thereby reducing the interest amount on loan against the property. While some lenders charge a penalty for foreclosure, others offer maximum savings through zero penalty charges.
Generally, the tenor for commercial property loans can extend up to 18 years, allowing great flexibility to lenders. Furthermore, many enable their customers to plan out their repayment plans and manage finances accordingly by offering a buffer time.
Borrowers can also use the EMI calculator available on the websites of several lenders to have a prior idea about their loan expenses and adjust pre-payment and disclosure accordingly.
Processing fees and other charges
A loan against property, such as a commercial property loan, is a secure financing option that requires borrowers to pledge an owned property. In my experience, lenders often add some associated charges on the credit amount.
Hence, before applying, it will help the borrowers understand the different types of charges and fees for a loan against property.
Interest rates on commercial property loans
Commercial properties are assets that generate revenue. Thus they are considered to have a higher value. The interest rates for these types of loans are higher than residential ones but lower than personal loans. Mortgage loan interest rates in India generally vary between 9-15% per year. However, these rates depend on the lender.
Moreover, individuals can use loans against property to start their business for its cost-effective interest rates, being secured by collateral.
Who are eligible for commercial property loans?
Both salaried and self-employed individuals can avail commercial property loans. The eligibility criteria may vary among different lender but mostly includes the following:
- Age: 28 to 58 years
- Indian nationality
- Employment status salaried or self-employed.
Lenders with a good CIBIL score (above 700) also get an added benefit in securing a substantial amount at low-interest rates.
Furthermore, some lenders offer pre-approved loans on products like commercial property loans, LAPs etc. Therefore, borrowers can avail this feature to get a swift approval process without any hassle. They can enter their name and contact information to check their pre-approved offers.
Loans against commercial property are effective financial options lenders can use to pursue their higher studies, meet emergency expenses, etc. In my experience, these are secured loans with valuable assets pledged to the lender. Hence, one must cross-check their eligibility and benefits offered to reap the maximum benefits from this credit option.
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