A Loan Against Property (LAP) is an excellent financing tool. This type of loan involves a borrower taking a loan against a property they own. The property pledged as collateral could be a residential or commercial property or even a piece of land.
The funds availed of come with zero end-use restrictions. Borrowers can use the money for any purpose they deem fit – buying a car or a home, clearing off existing debt, paying for a child’s wedding or higher education, etc. Loans against property are one of the few loan options that give borrowers access to substantial funds — most lenders sanction anywhere between 50% to 60% of the value of the collateral as a loan. Loans against property interest rates also tend to be on the lower side.
Readers of this article must know that a LAP is the second cheapest loan after home loans. Though LAP interest rates are economical, developing an understanding of the factors that affect Loan Against Property interest rates can help one enhance the affordability of these loans. So, here’s a look at the factors that affect Loan Against Property interest rates.
Factors That Affect Loan Against Property Interest Rates
Borrower’s CIBIL Score
One may think that since loans against property involve collateral, the borrower’s CIBIL score should not matter much. This, however, is not the case. Lenders study an aspiring borrower’s credit report to gauge their attitude towards credit. A good credit score indicates a responsible attitude towards credit as well as good repayment capacity. Thus, with individuals whose credit score is in the range of 750 to 900, lenders know they will get their money back on time. Therefore, lenders extend their best offers to such borrowers. On the other hand, a low credit rating deems one as a risky borrower and leads to lenders offering high-interest rate home loans to borrowers.
Quality of the Collateral
In the case of loans against property, one of the key things is the collateral. The rate of interest offered also depends greatly on the quality of the property pledged as collateral.
Most lenders offer lower interest rates for residential properties as opposed to commercial properties. Lenders also see sanctioning a loan against old properties as well as properties located on the outskirts of a city as a risky affair and therefore, charge a higher interest rate on such properties. On the other hand, centrally located properties with all modern amenities draw a much lower rate of interest.
Borrowers must know that lenders reject all Loan Against Property applications involving disputed properties or properties with illegal construction.
Lender and Borrower Relationship
All lenders extend their best loan offers to existing clients. Why? The answer is simple: the lender has known the borrower long enough to ascertain their repayment capacity. Thus, they know the risk involved for them in lending money to the concerned borrower. Second, all lenders try their best to retain their existing customers and more often than not, they do so by extending favourable offers to existing clients. If you think you will need a Loan Against Property in near future, you should start building a relationship with the lender of your choice to avail of the best LAP offers.
Job and Income Stability
Loans against property are big-ticket loans. Therefore, lenders study the client or borrower profile carefully to minimize the chances of default.
If you are planning to apply for a Loan Against Property, know tha
t your lender will ensure you have a stable job and income before extending a loan offer to you. This is the reason borrowers ask lenders to attach their income documents with their loan applications.
If you are someone who switches jobs frequently, you may be offered a Loan Against Property at high-interest rates. Similarly, if you do not meet your lender’s income eligibility requirements, your application may get rejected. It is, therefore, crucial that you maintain job and income stability. Do not changes jobs often and if you do not meet your lender’s income eligibility requirements, add a co-applicant to your loan application. Further, use a Loan Against Property EMI calculator to figure out the loan amount you are eligible for and apply for this loan amount only.
Loan Tenor and Loan Amount
The loan tenor and loan amount also impact the interest rates offered to a borrower.
When borrowers opt for a long loan tenor, they not only increase their total interest payout but also increase the risk involved for the lender in lending money. This is the reason why lenders charge a higher rate of interest on loans against property involving a long loan tenor. If you wish to avail of a low Loan Against Property interest rate, keep the loan tenor neither too short nor too long.
Similarly, lenders find it comfortable to sanction 50% to 60% of the property’s value as collateral. Applying for a loan value higher than what you are eligible for will either lead to your loan application getting rejected or you being offered a loan at high-interest rates and other unfavourable terms and conditions.
So, before beginning your Loan Against Property application process, use a Loan Against Property eligibility calculator to figure out the loan amount you are eligible for and apply for this amount or something less than this to avail of low LAP interest rates.
Lastly, keep in mind that loans against property interest rates also depend greatly on external factors, such as the Repo Rate and SLR.
Most lenders give borrowers the option to link their LAP interest rates to the Repo Rate. The Repo Rate is the interest rate at which RBI loans money to commercial banks operating in the country. Banks and lenders add a spread to the Repo Rate to decide their minimum lending interest rate.
The Repo Rate is an important tool that the RBI uses to control inflation and maintain stable economic growth. When inflation increases, RBI increases the Repo Rate and vice versa. If, at the time of your availing of the loan, the Repo Rate is high, you will be charged a higher interest rate and if, on the other hand, the Repo Rate is low, your interest rate will be lower.
Loan Against Property interest rates determines the affordability of loans. Use the information shared in this article to your best advantage. Negotiate with your lender and try to avail of the lowest Loan Against Property interest rate possible. If there is another lender offering you lower Loan Against Property interest rates, opt for a loan against balance transfer if you are early in your loan repayment period.