Loan Against Property is an attractive finance option for those looking to take out a loan to meet their expenses. These are generally secured loans wherein the borrower has to pledge his property as collateral. This essentially implies that in case of default, the bank can use the property to recover the loan amount. The rates of interest in these type of loans is generally lower than other private loans because these being secured loans, the risk to the lender is considerably less. However, rate of interest is a major component which determines the cost of loan for the borrower. It determines the EMI he will have to pay towards the loan and therefore deserves due consideration. Rate of Interest differs from lender to lender.
Here are some of the factors that affect the interest rates for loan against property.
1. Credit Score – This plays a vital role in determining the interest rates for loan against property. Although a credit score 400 or above is considered decent, banks and financial institutions usually prefer a score of 700 and above. Anything around that will give you a lot of leverage to bargain with the lender on the interest rates. While a lower score can also fetch you a loan, but it’s on the sole discretion of the lender, and rates of interest would be higher.
2. Borrower’s Profile – Borrower’s age, occupation, residence, etc. have a lot of bearing on the interest rate. For instance, an elderly person around the age of 50-55 will get a loan at a higher rate of interest because he/she is nearing retirement and his steady monthly income will stop. This indicates a risky profile to the lender and therefore financial institutions charge a higher interest rate. On the other hand, a young professional in his 30s will find it easier to get a loan at attractive rates.
3. Collateral – Type of collateral or security also affects the rate of interest. Age of property, location, area, type of property i.e. commercial or residential are factors that have an impact on the rate of interest. An old property in a remote area will not fetch much value and therefore will command a higher rate of interest as compared to a relatively new property in the heart of town. Similar residential and commercial properties have different values and therefore rates of interest will differ accordingly.
4. Loan Tenure – This one is a no-brainer and is similar to other loans. Longer the tenure, higher will be the rate of interest and vice versa. Your EMI will also differ subsequently.
5. Type of Interest Rates – Type of interest rate like Fixed, Floating or Mixed also have a bearing on the interest rate charged. Fixed rate for instance is the rate fixed by the lender, floating interest rate keeps changing as per RBI norms and Mixed rate of interest is where the loan starts at a fixed rate of interest and then changes to floating rate after a certain period.
Therefore, as an informed borrower, it is your right and duty to be informed of all the terms and conditions before applying for the loan. Do your research, evaluate your profile and then discuss your profile with your lender. Of course some of these factors are in your control while there are others that are controlled by the market. It is important to stay aware of all the above points when you decide to take a loan against property as these will help you get the best value loan as per your budget and requirements.
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