Over the last few years, a loan against property, sometimes also known as a property loan, has become a popular way of arranging money, especially when one needs to take care of a financial emergency. One reason behind this is that it is easy to get approval on a loan against property. Since a loan against property requires a borrower to pledge collateral, lenders do not usually have very stringent eligibility requirements for these loans. More importantly, loans against property attract lower interest rates and come with a long repayment tenure.
If you are planning to avail of a loan against property, you must develop a thorough understanding of the factors that affect the interest rates on loans against property. These include age of the property, credit history, monthly income and so on. Developing an understanding of these factors and how they affect the loan against property interest rates allows one to get the lowest interest rates possible.
Factors That Affect Interest Rates on Loans Against Property
Income Sources
Lenders offer their best deals to individuals with a stable source of income as they are more like to repay their EMIs on time.
Stable employment, both for salaried and self-employed individuals, means a steady flow of income. This reduces the risk of loan default and delays in EMI payments. Thus, lenders charge a low-interest rate on loans extended to individuals with a stable source of income.
On the contrary, lenders charge a high-interest rate if the applicant does not have a steady source of income. Also, those with high incomes may receive a better interest rate offer from lenders.
Credit Score-
The loan against property interest rate you will get will directly depend on the credit score of the applicant. A good credit score indicates responsible repayment behavior in the past. With a history of limited or no loan default or delay in EMI payment, you assure the lender that the loan will be repaid on time and deem yourself a low-risk borrower in the eyes of the lender. Therefore, your chosen lender will offer you a good loan deal.
On the other hand, high-risk borrowers, i.e. those who have a bad or below-average credit score, find it hard to get a loan on good terms and conditions.
Property Pledged
In deciding the loan against property lowest interest rate, the kind of property being pledged has an important role to play. For different types of properties, commercial and residential, the final interest rate can be different. Lenders want properties that can easily be liquidated if the need arises. Thus, the condition and location of the property also have a bearing on the interest rate. Properties in good condition or newly built properties give an advantage to the borrower. Similarly, properties located centrally and in good areas of the city can help a borrower fetch a low-interest rate from a lender.
Age of the Borrower
Young borrowers have better chances of obtaining a lower loan against a property interest rate. This happens because lenders categorize them as low-risk borrowers. In comparison to older borrowers, young borrowers have more working years left ahead of them. Further, their income is also likely to increase with the passing years. Therefore, young borrowers are more likely to pay EMIs on time. However, this is only applicable to salaried individuals.
For self-employed individuals, age can be an advantage and the proven record of business can work in the favor of older applicants. Young self-employed individuals are generally new to the business. Considering the risks, lenders can levy a higher interest rate on loans taken by them.
Loan Repayment Tenor-
One of the best features of a loan against property is that it comes with a long repayment tenor. Thus, borrowers get the option to repay the loan over a long duration. Lenders levy a lower interest rate on loans availed of for a longer period. However, if a loan against property is availed of for a shorter period, lenders increase the interest considering the risk.
Loan-to-Value Ratio-
Before deciding the loan amount, A loan against property lenders assesses the market value of the property. The loan amount is divided by the market value of the property. This is known as the loan-to-value ratio. Individuals seeking a high loan-to-value ratio end up paying high-interest rates as sanctioning a high loan-to-value means higher risk for the lender and more loss in case the borrower fails to repay EMIs on time. To obtain an attractive loan against property interest rate, keep the loan-to-value ratio below 50%.
Final Words-
Loan against property is a safe and popular financial product and comes with several benefits. For keeping the interest rate reasonable or on the lower side, individuals must focus on the factors mentioned above. You can also keep an eye on the inflation rate, monetary policy, and RBI announcements. These macroeconomic factors also affect interest rates. Borrowers can also approach the bank they have a relationship with. Lenders generally offer better deals to their loyal customers. Together, these techniques can assist in securing an attractive interest rate on a loan against property.