Drop Line Overdraft Facility in Loan Against Property (LAP)

A Drop Line Overdraft (OD) Facility in Loan Against Property (LAP) is a type of secured credit facility where the sanctioned limit reduces periodically. This facility is particularly useful for business owners and self-employed individuals who need flexibility in managing their cash flows while utilizing their property as collateral.

Key Features of Drop Line OD in LAP

1. Sanctioned Credit Limit - The bank provides an overdraft facility against the property with a set credit limit.

2. Gradual Reduction in Limit - The credit limit drops periodically (monthly, quarterly, or annually) based on the agreed repayment schedule.

3. Interest on Utilized Amount - Borrowers pay interest only on the amount withdrawn, not on the total sanctioned limit.

4. Flexible Withdrawals & Repayments - Borrowers can withdraw funds as needed and repay at their convenience, as long as it stays within the sanctioned limit.

5. Secured by Property - The property is mortgaged to the bank or NBFC, and the loan is sanctioned based on its valuation.

6. Lower Interest Costs - Since interest is charged only on the utilized portion, the overall cost is lower compared to a term loan.

7. Renewable Facility - Generally, the facility is renewed annually after a reassessment of the borrower's financial position.

How Drop Line OD Works?

1. Example: A borrower gets a ₹50 lakh Drop Line OD with a 10-year tenure.

2. Limit Reduction: If the overdraft reduces by ₹5 lakh per year, then:

• In Year 1, the available OD limit is ₹50 lakh.
• In Year 2, the limit drops to ₹45 lakh.
• In Year 3, it reduces to ₹40 lakh, and so on.

3. Utilization & Interest: If the borrower withdraws ₹20 lakh in Year 1, interest is charged only on this amount, not the full ₹50 lakh sanctioned.

4. Repayments: The borrower can repay anytime (fully or partially), helping in managing cash flows efficiently.

Benefits of Drop Line Overdraft in LAP

• Lower Interest Cost - Interest is calculated only on the amount used, reducing the overall cost.
• Flexibility - Borrowers can withdraw and repay as per their business or personal needs.
• Better Cash Flow Management - Useful for businesses with seasonal income fluctuations.
• Tax Benefits - If used for business purposes, interest payments can be claimed as expenses.
• No Fixed EMI Burden - Unlike term loans, there's no fixed monthly EMI, providing greater financial flexibility.

Who Should Consider Drop Line OD in LAP?

• Business owners needing working capital with a property as collateral.
• Self-employed professionals with irregular cash flows.
• Borrowers looking for lower interest payments and repayment flexibility.
• Real estate investors needing short-term liquidity against property.

Comparison: Drop Line Overdraft vs. Regular Loan Against Property (LAP)

Feature	Drop Line Overdraft in LAP	Regular LAP (Term Loan)
Loan Structure	Overdraft facility with a gradually reducing limit	Fixed loan amount disbursed upfront
Interest Calculation	Charged only on the amount utilized	Charged on the entire loan amount
EMI Structure	No fixed EMI; borrower repays as per usage	Fixed EMIs throughout the tenure
Repayment Flexibility	High - withdraw and repay as needed within the limit	Fixed repayment schedule
Loan Tenure	Typically 5-15 years	Typically 5-20 years
Limit Reduction	Credit limit reduces periodically (monthly/quarterly/annually)	No reduction; fixed loan amount
Best Suited For	Business owners/self-employed with irregular cash flows	Salaried or self-employed needing lump sum funds
Prepayment Charges	Usually NIL if repaid from own sources	May have prepayment charges (varies by lender)
Tax Benefits	Interest is deductible if used for business purposes	Interest deduction under Sec 24(b) if used for a house purchase or renovation
Processing Time	Faster, as it works like an OD account	May take longer due to complete loan disbursement process
Usage Type	Ideal for working capital and business expansion	Best for long-term financial commitments like home purchase or education

Which One Should You Choose?

Choose Drop Line OD in LAP if:

• You need funds flexibly and want to pay interest only on what you use.
• You are a business owner or self-employed with fluctuating income.
• You want to reduce interest costs over time.

Choose Regular LAP if:

• You need a lump sum amount for property purchase, education, or a major expense.
• You prefer a structured EMI-based repayment plan.
• You want a longer repayment tenure.