Investment in real estate provides a sense of security to many. Moreover, land is limited in supply so there is always a demand for it. But it is quite an illiquid investment which you cannot get money out of your investment in a real estate property as and when you want. So does a person with a real estate property with a real estate investment always get stuck when in need for money? 

No, it doesn't have to be that way. There are many assets that can be used as a source of money or funds when in need. Loan against gold or fixed deposits or even against a property is common knowledge. However, did you know if you have a property that is lent out on rent, there is a loan that you can avail against the security of those future rentals?

We understand that this kind of lending is not very popular yet and not many are aware that their properties can not only earn them rental income but can also aid them in getting a loan. Through this article of ours, we will try to shed more light on the procedures involved in getting a loan against a rent agreement, eligibility criteria and all that you need to know about availing a loan against rental agreement.

 

Who Can Avail A Loan Against Rental Agreement?

Any individual who has a residential or a commercial property that is let out for a certain sum of amount is eligible to avail a loan against the rental agreement or rent receivables. Single owners or joint owners could apply for a loan against rent receivables. However, in the case of joint ownership of a property, all co-owners will have to be co-applicants to a loan against rental agreement / rent receivables. 

One of the important criteria for availing loan aagainst rental agreement is that this loan is available for those properties which have already been let out on rent or lease and an agreement is in place

 

What Are The Purposes For Which Loan Against Rental Agreement Can Be Availed? 

Many of the loans that are granted by banks or financial institutions are tied to a purpose like a Home loan can be availed only to buy a home /or a plot of land or a 4 wheeler needs to be bought with an Auto Loan or an education loan can only be availed for the purpose of meeting higher education. 

However, a loan against a rental agreement works like a personal loan and offers the applicant the flexibility to utilize the loan for any purpose. It could be to meet development needs of the property in question, cater to wedding or travel expenses, pay a down payment for some other loan or just about anything. This gives the applicant the flexibility to utilize the loan as per his /her needs.

 

Additional Reading: Loan Against Rent Receivables

 

Which Are The Lenders That Allow Loans Against Rental Agreement?

Generally, banks come forward to lend against rental agreement or future rent receivables. Some of the major banks that offer loan against rental agreement are as given below. But there are certain banks that insist on offering loans only for rental agreement of a commercial property as the rentals are much higher in that segment.

 

 Banks that offer Loans against Rental Agreement  Type of Property on which a loan can be availed  Features of the loan
 ICICI Bank  Only Self-owned commercial property  Property should be occupied by the Lessee
 Loan can be provided for various personal requirements (where mortgage is not possible)
 HDFC Bank  Commercial Property (Shops &Offices) let out to reputed lessees  Loan tenure can extend till a maximum of 108 months which also depends on the balance tenure of the agreement and other factors
 State Bank of India  Residential buildings and commercial properties which are to be rented or already rented to MNCs / Banks / large & medium size Corporate.  Allowed for a maximum tenure of 10 years
75% of [total rent receivable for the residual lease period or loan period, whichever is lower minus total of advance deposit, estimated amount of property tax, service tax, TDS and other statutory dues for the period
 Federal Bank  Eligible for Individuals/Firm/Company or any legal entity having assured rental/service/maintenance income from reputed Companies/Institutions/PSUs/Established Organizations including partnership firms/ Multinationals/ Other legal commercial entities

 Higher loan eligibility -maximum at Rs.20 Cr and tenor up to 120 months.

 

What are the advantages of going in for a Loan against Rent Agreement?

On one hand, we say that the loan against the rent agreement works just like a personal loan, so you might be wondering if it might be good to go in for a personal loan instead. However, there are certain advantages of this loan which might make you feel otherwise. Read on to know more. 

  • A loan against rental agreement is based on the rental of a property and the value of the loan is based on the current market value of the market. Hence a quantum of loan that can be obtained through loan against rent agreement is bigger than a personal loan.
  • A personal loan is an unsecured loan and hence the loan carries a higher rate of interest, while the rent against loan agreement comes at lower rates as it is a secured loan
  • A loan against rent agreement comes for long tenures of 10-12 years than a personal loan which is allowed only for a maximum of 5 years.
  • Repayments on loan against rent agreement is easy as you are still receiving the rentals in your account and it can take care of  your EMIs  
  • The only advantage of a personal loan may be quicker approvals as the documentation need is minimal. Whereas, the loan on rent agreement will take time till the property documents are satisfactorily verified by the bank officials. 

 

Additional Reading: What are the allowable expenses against rental income?

 

EndNote

Loan against rent agreement does come across as a convenient replacement for a personal loan if you have a property that is let out on a lease/rent. However, the bottom line holds good that it is a loan and that needs to be repaid on time or else your credit score may take a hit.