A loan against property (LAP) or property loan is a collateral loan product by which residential, industrial, or commercial property is taken as security against a loan. It is one of the sought-after and well-known money-generating financial products for individuals or organizations seeking a heap of money. But the interest rate you choose is of grave importance when determining the overall cost of the loan. You should know the factors influencing property loan interest rates before you choose a loan against property. A well-informed decision will help you avoid wasting your money and simplify your repayment process.
Following are the key things to check before you lock a property loan’s interest rate:
1. Type of Interest Rate
When considering the interest rate of a property loan, the borrower must understand what types of interest rates lenders offer. Lenders generally offer two types:
Fixed Interest Rate
In this case, the interest rate is fixed throughout the loan term. The fixed rates are greater than the floating rates but provide fixed EMIs, which are optimal for customers who prefer it the same way each time and do not wish to risk market movements.
Floating Interest Rate
It is liable to fluctuation with changing market conditions or the lending benchmark rates of the lender. The floating rate may be low compared to a fixed rate but keeps fluctuating back and forth repeatedly, leading to varying EMIs. Borrowers who can bear some money risk choose floating interest rates usually.
Judge your financial position and prospects in advance to decide what will be the best interest rate that could be best for your needs prior to availing property loan against the same.
2. Size of the Loan and Tenor
Two essential parameters that decide the property loan interest rate are the tenor of repayment and the loan amount. On the whole, greater loan amounts can be borrowed with good interest rates if your credit history is favorable. However, if your credit history is favorable, longer repayment tenors may reduce your EMIs but lead to paying greater interest over the life of the loan.
If you opt for a property loan, you will have to balance quantum, tenure, and repayment cost as a whole. You would be attracted to short tenures if you can afford paying more EMIs and do not want to pay interest charges at all.
3. Comparison of Lenders
Various interest rates on property loans are provided by various lenders based on their risk profile, operating cost, and policy. Interest rate on loan against property varies considerably bank to bank, Non-Banking Financial Companies (NBFCs), and other institutions.
Compare the rate of interest among different lenders before you close a loan. Next, compare the processing charge, foreclosure charge, and other expenses jointly that can make the loan cost balloon. Proper comparison shall lead you to the lowest rate of property loan as per your requirement.
4. Credit Score
Your credit score is also the largest determinant of your interest rate for your property loan. It is a three-digit score that indicates your payment history and credit standing. The higher your credit score, the lower your interest rate because banks consider you a less risky borrower.
Prior to borrowing against property, keep your credit score in the best possible shape. Have your credit report free of any discrepancy or flaw and rectify it immediately. In the event of a poor credit score, invest a couple of months improving it by paying dues, honoring bill payments on time, and keeping the credit utilization ratio low.
5. Collateral Property Type
The value and type of property you are presenting as collateral will set the interest rate for the property loan. The title, place, and market value of the property will be taken into account by the lenders. The stronger the titles and the location, the safer the property, to which you provide competitive prices.
Make sure your property papers are complete and current before you get a loan. You may also be offered better terms of the loan, such as a lower rate of interest, if the property has been positively assessed by the lender.
6. Repayment Capability and Income
Your ability to pay back and your earnings fix your interest on your property loan. Banks verify your financial health so that you will not be able to repay EMIs. Salaried persons and self-employed with stable and good source of income are normally given better interest rates.
Collecting documents in evidence of a regular source of income like salary vouchers, tax returns, or company balance sheets will impress the lender with your credibility. Having a good debt-to-income ratio also boosts your likelihood of getting favorable terms on the loan.
7. Economic Conditions
Interest rate on residential loans also fluctuates when it comes to macroeconomic variables like inflation, monetary policy, and movement in RBI benchmark lending rate. The interest rates are relatively low being provided by financial institutions when the economy is stable or there is low inflation. The interest rates are more expensive when there is uncertainty in the economy.
Recall such external factors before taking a loan against property. Taking a loan at the appropriate time when the economy is stable can be in your best interests while purchasing loans with lower interest rate.
8. Prepayment and Foreclosure Policies
While choosing the property loan, ensure the lender permits prepayment or foreclosure at minimal charges. Loan borrowers can at times opt for loan repayment prior to the agreed deadline in an effort to decrease the total interest burden. If the prepayment conditions of the lender are expensive or punitive, they influence the affordability of the loan.
Negotiate the terms of prepayment with the lender before signing the loan contract. Choose a lender who is cooperative and charges minimal pre-closure fees.
9. Special Offers and Discounts
There aren’t many lenders who provide special rate reductions for selected groups of borrowers, i.e., aged citizens, lady borrowers, or repeat borrowers. Even some lenders launch special offers on festivals, e.g., low rate of interest for property loans.
Beware of such offers as they will reduce your cost of borrowing to a great degree. Read terms and conditions carefully before you accept such offers while you apply for loan against property.
10. Administrative and Processing Charges
In addition to the interest rate on the property loan, the processing fee and the administration fee are also the cost of the loan. Very high processing fees will eliminate the advantage of a low interest rate, thus resulting in higher loans overall.
Negotiate with the lender prior to signing the loan contract, also the quantum of extra charges over and above the rate of interest. Transparency regarding the charges will avoid leaving you with shock money in future.
Conclusion
Choosing the most appropriate property loan rate of interest is essential for reducing your cost of borrowing. Since you can consider if the interest rate is fixed or floating, your credit history, valuation of property, lenders comparison, and the economy, you are in a position to be able to ensure that the loan terms are in line with your financial objective. You should also add repayment flexibility and processing charges because both of these have a key impact on your total cost of borrowing.
Make sure you do proper research and due diligence before moving forward to apply for a property loan. Consult several lenders, contrast their rates, and select a reasonable loan agreement in terms of interest rate as well as terms to customers. A good plan will help you to optimize your loan and secure your financial future.
Maximize your borrowing experience with the help of information that you can get here. The more prepared you are, the greater is the likelihood to get low-interest and advantageous loan terms!
