Loans Against Property has an appeal among business people that needed immediate capital to help in moving their business to the next level. The popularity of this type of loan as against personal loan arises from the fact that the interest on it is very low. There are risks involved and it is going to be our central focus.
The emergence of Big-Ticket loans combined with higher loan to value ratios has brought in some measure of pressure on LAP.
Many non-banking financial companies have come into the picture because of the gains involved in it and this has adversely affected the credit ratings in the sector. When the credit rating falls, the resultant ripple effects are better imagined than experienced.
Higher loans are increasingly been offered close to a third of the portfolios in this notch are loans with high LTV or big-ticket size. Close to 5% of the two loans are subject to very high risks falling credit rating.
Loans With Commercial Property
There is a movement towards loans that have commercial property as the collateral. The majority of the incremental loans close to a third are linked to commercial property.
There is a rush towards this area by lenders is based on the successes achieved by others as can be seen through the returns that come in with every loan agreement. The competition is intensifying in this direction at the detriment of other areas. A time will come when the notch will be saturated and when this happens, the bubble will burst in the sector.
The Use Of Intermediaries
When business owners need immediate cash and they do not have the collateral demanded by the lending houses, they result in getting wanted they wanted through the back door by going through intermediaries who pose to the lending houses as the real owners of the business. There is a growing increase in the number of balance transfers and it is not speaking well for the sector because the true ability of the borrow in repaying the loans cannot be measured. This has led to an increase in delinquent loans in the sector.
The saying that he who pays the piper dictates the tune is very true in this sector. There is a downturn in the global economy of the world. The business owner that fails to meet up with the projections on his income from the business will lose out entirely in the unfortunate event that he is not able to meet up with the loan repayment schedule.
The lender house becomes the ultimate gainer because they have the rights to the company in the event of failure to meet up with the demands of the loan as it is signed in the contract. It is estimated that the lenders will grow their business at an annual rate of 22% for the next couple of years to the detriment of the original business owners who are facing hard times.
The growth in the sector for the lenders has been impressive going by the records and the trend will likely go on in that direction for years ahead.
Discipline In Spending
Another risk in LAP is the area of discipline. Since this category of loan can be used for any purpose as it suits the borrower under the sun, there is the risk of misplaced priority upon the receipt of the funds from the lending houses. LAPs that are obtained and not used for business purposes will not end up in a sweet story. It has been observed that many that collected the loans used it for other purposes outside the expansion of their business concern.
Issues will naturally crop up when it is time to repay the loan. Lack of discipline on the part of lenders is one of the greatest problems facing the sector today. Even those that use the loan for business purposes are guilty of not directing it to areas in their line of business that will improve on their income. At the end of the day, the gains will not show and when this is the case, monthly payment of the loan will be a task that cannot be overcome.
For success to be achieved and sustained in LAP, there should be discipline and prudence in spending the loan amount. No company has arrived until the backlog of the loan is cleared. What is required is a sheer commitment, focus, and discipline to the cause of the business line of operation.
In every business venture, there are risks. If you do not take the risk in business, the gains will never come in. The above are the areas of banana peel that can cause business fall when you chose to take a LAP. Caution is the word; the advantages in LAP far outweigh the disadvantages.