What is Lease Rental Discounting?
Dec 12, 2023
Lease rental discounting (LRD) loans provide a practical way through which property owners can leverage their commercial or industrial property’s rental income. This arrangement allows lenders to take rental payments as collateral in exchange for loan services. The lease rental discounting loan process includes three main players: the lender, the property owner and the person who rents the property.
The LRD loan is beneficial because people can get financing based on the anticipated rental cash flow for a period, and at the same time, they still own property assets. The strategic approach provides owners with a direct avenue of liquidity without compromising their ownership position, which makes it ideal for any short-term financial necessities.
Lease Rental Discounting Loan?
A lease rental discounting loan (LRD) is a type of financing that allows property owners to borrow money against the future rental income generated by their property.
LRD loans benefit property owners with stable rentals who don't have sufficient property equity. Instead of looking at the borrowers' assets, the repayment is based on the rental payments.
Owners can only qualify for an LRD loan when they show proof of a substantial lease document and a capable lessee. The loan for these properties is calculated based on tenure, the tenant's creditworthiness, and the property's value. LRD loans are offered with flexible repayment schedules and attractive interest rates, providing the borrower with stability and convenience. These loans are also perfect for other purposes, including business expansion, purchasing property, merging debts, or remodelling a home.
How Does Lease Rental Discounting Work?
To understand how lease rental discounting works, it is essential to understand the roles of three key participants - the property owner, the tenant, and the financial institution.
The owner takes a short-term loan secured by the monthly rent. The lender determines the borrower’s income and approves the loan accordingly.
Simply put, the lender buys the future rent payments that belong to the borrower minus a fee and gives an equivalent amount as a loan. The tenants then pay the rent directly to the lending institution, not the proprietor. This helps in addressing immediate financial expenses effectively.
Features Of Lease Rental Discounting Loan
Agreement Among Three Parties
In this case, the loan is backed by the expected rental income of a property. The discounted loan is typically provided based on the anticipated rent, and the tenant promises to pay the rent directly to the lender. This agreement simplifies the loan process by directing the rent towards loan repayments.
Competitive Interest Rates
Regarding returns, LRDs for rented commercial or industrial properties offer higher returns. This setup allows businesses to avail loans at attractive rates of interest.
Dual Use Of Property
With LRD, owners can maximise their property's utility. LRD allows owners to increase their available funds to get a loan against the property and use the rental income to obtain another loan.
Balanced Cash-Flow
To streamline the loan process, many lenders now offer extended loan tenures to accommodate larger loan amounts. This asset is valuable for business owners as the consistent rental income from properties can easily cover the monthly loan payments, eliminating repayment stress. Ultimately, this leads to steady cash flow and stability for the business.
Purpose Of Lease Rental Discounting Loan
Availing a loan via lease rental discounting can serve a variety of purposes, including:
Business Expansion
One of the most common uses of LRD is business expansion. Property owners can obtain funds through LRD and invest in more properties to grow their businesses. This eliminates the need to strain their finances. This is a valuable way to meet business needs while keeping expenditures low.
Repayment of Loans
With comfortable repayment schedules and competitive rates of interest,
LRD is a budget-friendly option for property owners seeking to refinance or quickly pay off high-interest loans.
Purchase New Property
LRD can also serve to acquire new properties, creating even more opportunities for the lessor to generate rental income. Not only does the original property act as collateral for loan repayment, but it also eliminates the need for the lessor to cover monthly instalment payments personally.
Pre-requisites To Lease Rental Discounting Loan
Corporate Tenants
Financial institutions frequently base their decisions on projections of future cash flow to obtain a loan. However, this strategy is only effective if the cash flow can be predicted. Lenders can grant loans based on the rent they are receiving by utilising the lease rental discounting method. This benefits borrowers in obtaining the necessary funds and minimises risk for lenders.
Longer Lease Term
Landlords with lengthy lease commitments can secure substantial financing with extended payment schedules through leasing rental discounting (LRD). It's worth noting that financial institutions typically do not provide discounts for shorter terms using LRD.
Eligibility Criteria And Documents Required for Lease Rental Discounting Loan
Preparing the required documents beforehand saves you precious time and avoids last-minute issues. Applicants must fulfil certain conditions while applying. Here is a quick guide to the eligibility criteria and documents required:
Eligibility Criteria
- Age limit: Anyone (self or co-applicant) under the age group of 25 to 85 years is eligible to apply—the lower limit shifts to 18 years for a non-financial applicant. The upper age limit can be extended to 95 years if their second generation (legal heir) meets the age requirements and is added as a co-borrower to the loan agreement.
- Nationality: Indian residents can qualify.
- Employment status: The applicant can be:
- Salaried professionals (having rental income)
- Self-employed individuals (professionals/non-professionals)
Documents required
- Proof of identity, including your passport, voter ID, Aadhar card, PAN card, or driver’s license.
- A record of your balance sheet and income tax returns.
- Copies of your photograph.
- Rental agreement/lease deed/occupancy agreement/tenancy agreement, etc.
- Your application form.
- Summary of account balances over the past six months.
How to Apply for a Lease Rental Discounting Loan?
You can employ the following steps to apply for a lease rental discounting loan:
- Go to the official website and select the ‘Apply Now’ option.
- Enter the required information as accurately as possible in the application form.
- Upload the relevant documents as requested.
- Review your form carefully and click ‘submit.’
- An executive will reach out to you to assist with the pending formalities.
Fees and charges for Lease Rental Discounting Loan
| Fee Type |
Associated Charges |
| Interest Rate |
For salaried - 9.50% Onwards For self-employed - 10.50% Onwards |
| Fees for Processing |
Up to 3% of the total loan amount. |
| Application Fees |
Up to INR 10,000/- |
| Documentation Fees |
Up to INR 5000/- |
| Foreclosure Letter Charges |
INR 500/- |
| Cheque/NACH/ECS Dishonour Charges |
INR 500/- every instance. |
| Loan-cancellation Expenses |
INR 5000/- post disbursement. |
| Charges for Original Document Retrieval |
INR 1000/- |
Pre-payment Charges (in part or whole) - For Home Loan/ Self Construction of home / Plot + Construction of home / Extension, Improvement or Home Renovation |
Individual Borrowers (Primary and co-borrowers) and Floating rate of Interest - with or without non-individual
No prepayment charges shall be
co-borrower - (Home should be on Individual name and end use should be for buying a home, self-payable for partial/complete prepayment
construction of house, Plot+ construction of house, Extension, Improvement or renovation of Home).
|
No prepayment fees will be charged for early repayment of the loan in full or in part. |
| Non-individual borrowers and Floating rate of Interest (Home should be on Non-Individual name)
|
0-12 MOB: 7% of the prepaid amount
>12 MOB: 5% of the prepaid amount |
| Fixed Rate (Full tenor) (except for individuals making pre-payment out of their "own sources", i.e. not from borrowing from any Bank/ Housing Finance Company/ Non-Banking Finance Company/ any Financial Institutions/ any other sources)
|
0-60 MOB: 7% of the prepaid amount
>60 MOB: 5% of the prepaid amount |
Pre-payment Charges - For Non-Home Loan - Loan Against Property (LAP), Commercial Purchase of Property (CPOP) etc.
| Loan Purpose |
Interest Rate Type |
|
| Business |
Individual borrowers (primary and co-borrowers) and Floating interest rate |
5% of the prepaid amount. |
| Non-Business |
Individual borrowers (without or without non-individual co-borrowers) and Floating interest rate. |
No prepayment fees will be charged for early repayment of the loan in full or in part. |
| Any |
Fixed Rate (Full tenor) (except for Individuals making pre- |
0-60 MOB: 7% of the prepaid amount |
|
payment out of their "own sources", i.e. not from borrowing from any Bank/ Housing Finance Company/ Non-Banking Finance Company/ any Financial Institutions/ any other sources) |
>60 MOB: 5% of the prepaid amount |
| Any |
MSME/Sole-Proprietorship Firms/Non-Individuals and Floating Rate of Interest |
0-12 MOB: 7% of the prepaid amount
>12 MOB: 5% of the prepaid amount |
Conclusion
Lease Rental Discounting (LRD) loans emerge as a strategic financial tool, empowering property owners to unlock the potential of their commercial or industrial spaces. With a commitment to providing financial solutions tailored to your needs, SMFG Grihashakti ensures a seamless experience throughout the loan journey. With a 100% online application process, flexible repayment terms, attractive interest rates and a customer-first approach, we are ready to be your trusted financial partner. Apply now!
FAQs on Lease rental discounting
What are the lease rental discounting eligibility criteria?
To qualify for lease rental discounting, you must,
- Be of Indian nationality.
- The age limit must be between 25 to 85 years (with some exceptions).
- Own an industrial/ commercial/residential property that can generate a lease. The property must be free from litigations.
- Have a credible rental agreement.
- Have a consistent flow of rent.
What are the lease rental discounting charges?
The interest rates involved in LRDs start from 9.50% (for salaried individuals) and 10.50% (for self-employed) at processing fees of up to 3% of the total loan amount. For more information, you can refer to the official website here.
What documents will I need for lease rental discounting?
You may need to provide the following information while applying:
- Proof of identity, including your passport, voter ID, Aadhar card, PAN card, OR driver’s license.
- A record of your balance sheet and income tax returns.
- Copies of your photograph.
- Rental agreement/lease deed/occupancy agreement/tenancy agreement, etc.
- Your application form.
- Summary of account balances over the past six months.
What is the purpose of the LRD loan?
As LRD uses rental income as collateral, it provides financial aid for various property needs without collateral. It works on a projected income model. Availing of an LRD loan can serve multiple purposes, including:
- Business expansion
- Debt consolidation
- Home Improvement
- Purchase of a new property
How is LRD eligibility calculated?
The following factors determine the eligibility for LRD:
- The property value.
- The total term of the lease agreement.
- The tenant’s creditworthiness.
- The applicant's financial profile.
- The lease term and rental income ratio is usually 70-80% of the property's value, including the rental income it generates.
What is the difference between LRD and LAP?
Though the LRD (Lease Rental Discounting) and LAP (Loan Against Property) are financing options for property owners, they differ in how the loan amount is determined:
In LRD, the discounted value of projected rental income decides the loan amount. In the case of LAP, the property's market value has a significant say.
What is the interest rate for LRD?
The exact interest rate typically depends on how much the lending institution deems you eligible for the loan. They may factor in the total loan amount and your creditworthiness to agree on a specific interest rate.
Disclaimer: *Please note that this article is for your knowledge only. Loans are disbursed at the sole discretion of SMFG Grihashakti. Final approval, loan terms, disbursal process, foreclosure charges and foreclosure process will be subject to SMFG Grihashakti’s policy at the time of loan application. If you wish to know more about our products and services, please contact us.