A loan against property (LAP) can be a useful financing option. It helps you to take a loan by pledging your property as collateral and is open to business owners and self-employed professionals. But, before you apply, it’s important to understand what factors influence interest rates on a loan against property. Knowing these factors can help make a more informed decision and boost the chances of receiving the best offer.
4 Factors Influencing LAP Interest Rates
- Loan Tenure
The interest rate on a loan against property will be greater if your loan tenure is long. This is because a longer loan period entails a larger risk for the lender due to the increased likelihood of default or changes in market conditions. On the other hand, if your loan tenure is short, you pay less interest on the loan.
- Credit Score
Your loan against property eligibility and interest rates are both influenced by your credit score. You will be charged a higher interest rate if you have a low credit score, as lenders perceive you as a high-risk borrower.
Conversely, having a good credit score helps to get a lower interest rate. It demonstrates that you have a history of making repayments on time and appropriate financial behaviour, making you a more trustworthy borrower.
- Eligibility Criteria
Another factor that affects your interest rate on a loan against property is the eligibility criteria. This includes your age, employment or business status and monthly income. Your eligibility criteria influence the interest rate your lender will offer to you. For example, the lender might charge a greater interest to someone on the verge of retirement. Similarly, a lender might charge a lower interest rate for someone with a stable income and employment history.
- Loan-To-Value Ratio(LTV)
The loan-to-value ratio is essential in setting the interest rate on a loan against property. The loan amount is represented as a proportion of the property’s value via the LTV ratio. For example, if the property is worth Rs. 1 crore and the loan is worth Rs. 60 lakhs, the LTV ratio is 60%.
Lenders evaluate loan applications using the LTV ratio as a risk indicator. A lower LTV ratio shows that the borrower owns more of the property, lowering the risk of default. As a result, a lower LTV ratio is often regarded as more desirable and may result in a cheaper interest rate. A larger LTV ratio, on the other hand, indicates that the borrower has less equity in the property, which raises the chance of default. As a result, to compensate for the risk, the lender may charge a higher interest rate.
Conclusion
LAP can offer individuals the necessary financial aid. Being thorough and diligent in applying can save money on interest rates. Meeting the loan against property eligibility criteria can also help lower interest rates. Remember, proving your reliability and creditworthiness can go a long way in helping you secure the financial assistance you need.