Since a loan against property in India is backed by a security, you usually pay a lower interest rate on it as compared to an unsecured loan. Keep in mind that you have a choice between two types of interest rates on these loans: fixed and floating. Both of these have their own pros and cons, so here’s more on how these rates differ to help you bag an affordable sanction.
Fixed interest rate
When the interest rate on your loan is constant throughout the tenor, it is called a fixed interest rate. In this case, the interest rate is not affected by market fluctuations and thus remains unchanged. Choose a fixed rate if you want to pay a fixed EMI for your chosen tenor if you want to avail loan against property. However, note that fixed interest rate loans may be costlier than floating rates at the outset.
This is because lenders cannot pass on any rate increase to you until the reset period. Read the reset clause carefully, because fixed interest rates will change at some point over the course of your tenor, especially if it is a long duration. Also remember that if the RBI repo rate drops, your lender may not pass on this benefit to you when you choose a fixed interest rate loan. Additionally, fixed interest rate loans involve prepayment and foreclosure charges, so check these out and consider the cost if you plan to repay the loan before the tenure ends.
Floating interest rate
When the rate of interest on your loan is not fixed and is influenced by market fluctuations then it is called a floating or fluctuating interest. Here, the interest rates are linked to the lender’s base rates or MCLR, which is impacted by the RBI’s repot rate changes. Thus, an increase in the interest rate shoots up the tenor, whereas a decrease shortens it. Though the EMIs remain unchanged throughout the tenor, the fluctuations impact the tenor of the loan. However, if you think this will increase your total interest costs, you can request your lender to increase your EMIs and repay the loan in time or sooner.
A floating rate comes with zero floating and prepayment charges and passes on the benefit of repo rate cuts to you. This can help you repay more affordably; however, it does bring uncertainty as the tenor on your loan may fluctuate.
Now that you know the two main types of loan against property interest rates, read the three important factors that affect them.
Your credit score
Having a good credit score of 750 and above shows the lender that you are creditworthy and so, the lender categorises you as a low-risk applicant. Therefore, they charge you a lower interest rate. Conversely, a low credit score indicates that you are financially irresponsible, which labels you as a high-risk borrowers. Thus, the lender may charge a high interest rate or even reject your application.
Type of property
Since this loan is backed by property, the asset that you pledge has a huge impact on the interest rate. Loan against property interest rate differ across properties and an industrial, commercial, and residential property is likely to fetch you different interest rates on your sanction. Also, the vintage and condition of the property affect the interest rate. A property in good condition may attract lower charges as compared to one that is dilapidated.
A loan against property interest rates is also affected by the length of the tenor that you choose. Mortgage loans typically have longer tenors of up to 15 years and may increase depending on your lender. As a thumb rule, longer the tenor, lower are the EMIs and vice versa. Some lenders may charge you a higher interest rate if you ask for a shorter tenor. However, if you select a longer tenor in a bid to avoid high rates, you may have to pay interest for an additional number of years as compared to a shorter tenor, which increases your credit cost.
Interest rates impact how affordably you can repay your loan. So, when scouting for a loan against property, look for lenders that offer competitive rates along with other benefits.
Author Bio: Gaurav Mittal is a Content writer and he loves to write about Finance & Insurance Articles.