Emergency financial needs may arise at any point during your life. It is important to have the capacity to manage them on a timely basis. If you own a residential or commercial property, there is an easy way to fulfil all your unexpected financial needs. You can do this by opting for a loan against property. Wondering what it is? Continue reading to find out.
If you own a property in your name, you can choose to mortgage it with a financial institution and avail a loan in return. This kind of a loan that you avail is known as a loan against property (LAP). The funds that you receive in this manner can be used by you to satisfy your urgent needs. You can then repay the amount due in instalments, along with interest.
That said, before you go ahead with this method of gaining access to funds, it is important to ensure that you meet the loan against property eligibility criteria. The criteria may vary from one lender to another, so remember to read through the terms and conditions first before proceeding.
As with any loan, one of the most important aspects of the LAP facility is the interest rate. The lower the rate is, the lower your financial burden is likely to be. And as it turns out, there are a multitude of factors affecting loan against property interest rates. Let’s take an in-depth look at these factors:
Profile of the Property : The nature of your property is one of the most important factors affecting loan against property interest rates. Since your property acts as the collateral, lenders usually analyse the profile of the property before arriving at the rate of interest to be charged. This includes taking into account the type, the location, the current market value, and the age of the property. Generally, borrowers with commercial properties at prime locations tend to get better interest rates on their loans than individuals with residential properties on the outskirts of the city. This is because the former has a higher value than the latter, in most cases.
Economic Factors: Macroeconomic factors like inflation, repo rates, and the general economic well-being of the country play a huge role in determining the interest rates on loans against property. For instance, if the rate of inflation in the economy rises, the Reserve Bank of India (RBI) raises the repo rates to stem the flow of currency. This directly leads to an increase in the interest rates on loans. And similarly, when the repo rates are lowered, the interest rates on loans against property also tend to go down.
Credit Score and History : This is by far one of the most influential factors affecting loan against property interest rates. Generally, lenders tend to look at the borrower’s credit score before granting a loan. The chances of availing a loan against your property at competitive interest rates go up if you possess a credit score of at least 700. That’s not all. Your credit history will also be analysed by the lender. If your history is long and well-recorded, and if you have a record of timely payments, you might be able to get interest rates that are highly competitive.
Tenure of the Loan : The tenure of the loan you opt for also affects the interest rates on your LAP. Typically, the shorter the repayment tenure, lower will be the interest rates. This is because the risk taken by the bank is lower. However, in case of longer tenures, the possibility of the borrower defaulting is spread out over a longer period, leading to extended risk for the bank. So, the bank may raise the LAP interest rates slightly to compensate for this.
Income Levels: Many individuals may be of the opinion that income levels don’t matter when opting for a loan against property. However, that’s not always true. Despite pledging your property as collateral, lenders may still require the borrower to have a sufficient income level. This is because it determines the repayment capacity of the borrower. An individual without a stable source of income has a higher risk of default Also, the higher your income level is, the better the interest rate on the loan is likely to be.
Type of Interest Rate on the Loan: Another major factor affecting loan against property interest rates is the type of interest that you opt for. Lenders usually give you the option to choose between fixed rates and floating rates. As the name itself signifies, fixed interest rates remain the same until the end of the loan repayment tenure. Floating interest rates, on the other hand, are based on RBI’s benchmark rates. These rates are revised on a quarterly basis. So, floating interest rates also tend to change accordingly. That’s not all. Since floating rates change so often, they usually tend to be lower than fixed rates by a small margin.
Relationship with the Lender: Having a good relationship with your lender goes a long way when it comes to getting attractive interest rates on loans against property. Borrowers who have a long history and an impeccable record of repayment with a lender are usually offered lower rates of interest than other individuals. Also, new borrowers might have to contend with strict credit appraisal processes, unlike borrowers with a long standing relationship with the bank.
Now that you’re aware of the factors affecting LAP interest rates, you should be able to make a more informed decision when it comes to availing a loan using your property. That said, before you initiate the process, remember to first check the loan against property eligibility criteria of the lender with whom you’re looking to avail the facility. This way, you can prevent unnecessary rejections and ensure that the loan is approved without any hassles.