Multiple factors play a role in your LAP interest rates being determined. It can be overwhelming for borrowers to go through all of them. This article discusses the 6 main factors that affect it.
Loans against properties (LAP) are taken against the mortgage of a residential or commercial property or plot you own. Prior to the loan being sanctioned, the property is evaluated for its value. If the title deeds are found to be in place and free of any discrepancies or legal issues, then the loan is given at a certain percentage of the property’s market value at the time. Lenders and financial institutions usually offer 40% to 60% of the property’s value as the loan amount.
When taking a loan against property, it is essential to look into its affordability to ensure your financial health is secure in the long run. Affordability is mainly determined by the interest rate you get. The following are a few factors that affect interest rates on loans against properties.
Top Factors That Affect the Interest Rate on Loan Against Property:
- Financial Profile
Your income is the most significant aspect of your financial profile. Your income is one of the leading indicators of your repayment capacity, and a higher disposable income is a good sign for lenders. It certainly gives you an edge over other applicants in availing of a LAP at a competitive and relatively lower interest rate. Other factors include your age when the loan matures as it impacts your retirement.
- CIBIL Score
The credit score is essentially a 3-digit numerical that Credit Rating agencies provide. It is solely based on your repayment history of credit card bills, other debts and defaults in payments. A score of 750 and above is considered a good score. Anything above that will only increase your chances of sanctioning a loan and getting a better loan against property interest rates.
Your CIBIL score, or credit score, plays an equally important role in determining whether or not you will receive the loan at a competitive interest rate. It mirrors your history with repaying debts, your disposable income, and spending. These factors show the lenders whether you are a good fit for giving a loan to.
- Employment and Job Stability
Given that income is such a large part of the consideration, lenders automatically take employment into account. Job stability until the end of the loan tenure is something that many borrowers overlook. Lenders look into the company or organization you work for and see if it is an established and reputable place that ensures no job volatility. In case lenders deem the organization you work for unstable or volatile, it is much more likely for your interest rate to be higher.
- Debt-to-income Ratio
The debt-to-income ratio is the percentage of disposable income going towards debt repayment every month. Your total debt repayments divided by your total income is the debt-to-income ratio. A higher than 50% DTI makes loan application acceptance less likely. Your pre-existing loans and the amount of income spent on EMIs significantly impact the loan against property interest rates. The lower your debt-to-income ratio is, the better.
- Features of the Property
The property’s features to be mortgaged determine the interest rates that will be charged on your loan against the property. Meaning, lenders will want to inquire about the type of property that you have put up for a mortgage, what its location is, its age, overall condition and other relevant factors. If it is a highly valued property in an excellent locality, then the interest rates will likely be lower.
- Loan Duration
The tenure for which you are undertaking a loan impacts the interest rate charged on it. LAP loans are long-term loans, and you need to set aside a fixed amount for EMIs every month. The shorter the loan duration, the higher will be the EMI amount due to lesser installments. Lenders might levy a higher interest rate if you apply for a shorter tenure loan instead of one with a longer tenure.
Overall, inferring from the points mentioned above, it is evident that the interest on loans against properties can be lowered by considering a few aspects. Taking them into account can inadvertently even expedite the entire loan-taking process. To navigate through this in an efficient manner, borrowers are advised to commit to lenders who offer competitive interest rates and flexibility in loan tenures and EMIs. Doing so will help you be debt-free sooner without any financial strains!