Loan against property is a secured loan type that allows you to borrow money against a property you already own. It is a multi-purpose loan that you may obtain from a lender by pledging an existing asset as security. Lenders lend 40-70% of your property’s market value, depending on the lender’s policy and asset’s worth. If you satisfy the lender’s eligibility conditions and documentation requirements, you may use any commercial or residential property as collateral. Also known as LAP loans, these loans come with flexible repayment terms that you can select based on your repayment capacity.
The working of a loan against property is pretty simple. You borrow a loan from a lender by pledging a property you own and repay it along with the interest rate in easy EMIs during the repayment tenure you select. If you fail to do so, the lender gets the right to seize your pledged property and clear your account. However, when it comes to loan repayment, most borrowers are concerned about the loan against property interest rate. Therefore, it is crucial to understand the factors that affect your interest rate. Here are the most significant ones.
Not only for a loan against property but any loan type, this 3-digit number is the core of any loan application. A high credit score indicates consistent repayment history and responsible credit behaviour, which works in your favour to get a higher loan amount at a lower interest rate.
Paying your loan EMIs and credit card bills on time, keeping your credit utilisation ratio low, maintaining old accounts, and not seeking too many credit cards or loans at a time are some of the best ways to maintain a high credit score. A score of 700 or higher is an ideal score most lenders demand to evaluate your loan application.
Lenders offer a LAP loan after evaluating the property you wish to put as collateral. Depending on the type (commercial, residential, warehouse, industrial), construction date, condition, and location of the property, the lender decides your mortgage amount. So, if your property has a premium location and is in good condition, you may fetch a lower interest rate on your loan.
Type of Interest Rate
A loan against property comes with two types of interest rates: fixed and floating. A fixed interest rate remains the same throughout the loan term. Whether high or low, the lender sets your interest rate at the time of the loan agreement, and you have to pay its EMI during your loan term. However, if your lender offers a floating interest rate on your LAP loan, the interest rate will fluctuate according to the market rate. If the market rate increases, your interest rate will increase too, and vice versa.
Some lenders also offer a combination of fixed and floating interest rates. In this type of arrangement, the interest rate remains fixed for the first few years and then converts into floating for the rest of the loan term. So, in the case of a floating interest rate type, your interest rate largely depends on the market rate.
Younger loan applicants have a higher repayment rate than older age people approaching their retirement. Therefore, the younger your age, the lower your loan against property interest rate will be.
The lender will check your credit profile before determining your loan amount and interest rate. Your property location, source of income, and job profile are the most crucial factors they consider. If you live in a metropolitan city and have a stable job with a regular income, you will get a higher loan amount at a lower interest rate. This is because the lender will consider you as a low-risk candidate who is less likely to default on the loan repayment.
Selected Repayment Tenure
The loan tenure you select primarily impacts your loan against property interest rate. It is a long-term commitment for which you need to pay a fixed amount of EMI each month. The shorter the tenure you select, the higher the EMI amount you will need to pay. The lenders may charge a higher interest rate if you opt for a shorter tenure. However, if you select a longer loan term, you stand a chance to pay a lower interest rate, but the total interest outgo will be higher. So, decide your loan tenure wisely to get the best deal.
LAP loan is a valuable source of credit to access funds during emergencies. It is one of the most popular and safest loan products among borrowers since the interest rates are lower than unsecured loans, and your asset is at risk only if you fail to repay your loan. Do you want to avail of this secured loan against your property? Know the factors mentioned above that affect your interest rates and take the plunge accordingly.