Loan Against Property (LAP) is a boon for property owners. It can be your saviour during any financial distress. A loan against property can fetch you a reasonable sum at a relatively low-interest rate. When it comes to availing a loan against property in India, one of the critical factors that borrowers need to consider is the interest rate.
The interest rate on a LAP represents the cost of the borrower. It can have a significant impact on your overall borrowing cost and can determine your monthly repayment amount. Therefore, it is essential to understand the factors that affect your loan against property interest rates in India. Let’s dive deeply into critical factors affecting loan against property rates.
What is a LAP?
A LAP is a type of secured loan offered by financial institutions to people who own a property and can keep it as collateral for the loan. Since it’s a secured loan, the interest charged is relatively lower. One can borrow a significant amount of funds using this loan. However, it won’t be greater than the property’s current value. Most lenders offer loans up to 80% of the property’s current value.
Factors influencing interest rate on LAP
Let’s explore some critical factors that can influence the interest rate on LAP.
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Credit score
The first and most crucial factor to consider is your credit score. The credit score is a numerical representation of your creditworthiness and is based on your credit history, repayment behaviour, and other financial factors. A higher credit score indicates that you have a good credit history and are more likely to repay the loan on time. As a result, lenders may offer you a lower interest rate on your loan against property rates. Conversely, a lower credit score may lead to higher interest rates, indicating a higher risk for lenders.
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Principal amount
Another critical factor is the loan amount on your property loan. Typically, lenders offer lower interest rates on higher loan amounts as they have more collateral to secure the loan. On the other hand, if you opt for a lower loan amount, the lender may charge a higher interest rate to compensate for the increased risk.
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Duration of loan
The loan tenure is the period for which you borrow the loan against property. The longer the loan tenure, the higher the interest rate you may have to pay. This is because longer loan tenures increase the risk for lenders, as there is a greater chance of default. On the other hand, if you opt for a shorter loan tenure, the lender may offer you a lower interest rate as the risk of default is lower.
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Nature of collateral
The type of collateral that you pledge as security can also affect the loan against property rate. Typically, lenders offer lower interest rates on properties in good condition and in prime locations. On the other hand, if you pledge a property in a less desirable location or in poor condition, the lender may charge a higher interest rate to compensate for the increased risk.
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Income
Your income is another factor that can impact the interest rate on your loan against property. Lenders may offer you a lower interest rate if you have a stable and high-income source, indicating that you are less likely to default on the loan. Conversely, if you have an unstable or low-income source, lenders may charge a higher interest rate as it indicates a higher risk for them.
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Existing debt obligations
If you have existing loans, such as personal loans or credit card debt, it can impact the interest rate on your loan against property. Lenders consider your debt-to-income ratio when determining the interest rate on your loan against property. If you have a high debt-to-income ratio, lenders may charge a higher interest rate, indicating that you may have difficulty repaying the loan.
Final words
The lender’s policies and guidelines can also impact the interest rate on your loan against property. Different lenders have different policies and guidelines, which can affect the interest rates they offer. Therefore, it is essential to compare different lenders’ interest rates and policies before applying for a loan against property. Reputed lenders like Smfg India have customer-friendly policies that can help you borrow easily.