Staying fiscally prudent in today’s world is advisable. It starts with knowing where to invest excess funds for higher returns and how to borrow money at low rates. There are various types of investment tools that generate generous returns. So is the case with credit instruments that allow people to borrow money when needed. A loan against property is one such borrowing tool that people can use to avail of funds to meet different financial obligations. Read on to learn more about factors influencing loans against property interest rates.
What Is A Loan Against Property?
LAP or Loan against Property is a secured loan product that one can choose to borrow funds from lending institutions. The loan is offered against a property/asset pledged by the borrower. The total credit provided is subject to the valuation of the property. Therefore, the amount offered is lower than the property’s value. This loan product is offered to all types of borrowers since it is secured by an asset.
There are no restrictions on the usage of funds in this case. The loan amount can be used as per the borrower’s discretion. From medical emergencies to higher education and marriage, everything can be funded using a loan against property. It is important to note that in case of default, the lending institution reserves the right to sell the property and recover the amount lent. Since the risk for lending institutions is lower, the loan against property interest rate is also less.
Interest Rate Determinants For A Loan Against Property
The interest rate for a loan against property is on the lower end because it is a secured loan product. However, many factors can influence the interest rate. So let’s take a quick dive into the factors affecting the loan against the property interest rate.
The credit score of loan applicants
The first and most important factor which has a profound impact on interest rates is the credit score. A credit score is a three-digit number that summarises and quantifies a person’s credit history. Multiple factors are considered while calculating the credit score, including repayment history, credit mix, credit usage, etc. A higher credit score can help the applicant avail a lower interest rate for a property loan.
Loan to Value (LTV) ratio
The second factor in this list is the Loan to Value or LTV ratio. It is defined as the percentage of property’s value offered as a loan to borrowers. A higher LTV ratio can increase the interest rate because it will be riskier for the lending institution. Usually, lenders offer between 75 to 90 percent of the property’s current value as a loan.
The Marginal Cost of Funds Based Lending Rate, also popularly termed MCLR, is a crucial determinant of the interest rate for LAPs. It is the lowest interest rate that lending institutions can charge while lending funds to borrowers. The MCLR is reviewed and reset on an annual basis. A positive change in the MCLR will increase interest rates, and a negative change will reduce the interest rate for loans against property.
The duration of loan or loan tenure is another significant factor influencing the interest rate in the case of a loan against property. Short loan tenures will result in a lower interest rate in most cases. It happens because the risk of default is higher for long loan tenures. Therefore, it is recommended to wisely choose the loan tenure as per your repayment capacity and needs. An online EMI calculator can assist you in finding a suitable loan tenure quickly.
Applicant’s job profile
A stable job and a steady income source add to borrowers’ repayment capacity. Therefore, the applicant’s job profile plays a crucial role in determining the interest rate for a property loan. In most cases, salaried and government employees can easily avail of a lower interest rate due to the nature of employment. In addition, professionals like doctors, chartered accountants, etc., are also among low-risk borrowers. Therefore, a lower interest rate is charged by lending institutions.
Income Tax Returns (ITR)
Filing income tax returns consistently can work wonders in your favor. Many lending institutions ask the borrowers to submit their ITR reports to evaluate their earnings. Tax-paying citizens are offered a discounted interest rate in most cases, as the risk is lower.
Interest rates are higher for older applicants as compared to younger ones, as the loan tenures are shorter for the former.
From the above, we see the factors that affect the rate of interest for a loan against property.