Key Factors Affecting The Interest Rate On Loan Against Property

Do you own a property? You are eligible to get a long against your property to meet any emergency personal needs. What kind of interest rate is available on loan against property? How can I get the best interest rate on a loan against my property? 

Loan Against Property – A Snapshot

If you have your own property that is free from any loans or mortgages, then there is a very good option available to you to take a loan against it to meet various expenses at an affordable interest rate. Depending on the type of property, an individual can get about 40–70% of the market value of the property as a loan. Both residential and commercial properties can be used as collateral and loans can be availed on them by submitting the registration document and other necessary documents.

The important factor in any loan is the interest rate. While home loans are offered in the range of 6.7 – 14%, a ‘loan against property’ has a different interest rate range. There are multiple factors that have an impact on the eligibility and the rate of interest which can be offered on your application. Let us take a look at them. 

Your CIBIL Score or Credit Score

Your credit score is a 3-digit number ranging between 300 to 900 that indicates your credibility to the lender. Higher the credit score lower is your risk ratio. A credit score of 700 and above is considered ideal to land a good interest rate. 

The credit score of an individual plays an important role in deciding the eligibility and percentage of interest on which the loan can be granted. Any score that is above 650 is considered good enough to get competitive rates on loans secured against property in the market. Individuals with low credit scores are considered high-risk borrowers by the lenders and hence get the loans approved at a higher rate of interest. In some cases, bad credit scores can also lead to the rejection of loan applications themselves. 

Financial Profile of the Loan Applicant

The borrower’s profile also affects the loan eligibility and the percentage of interest. While screening your application, the lenders consider the borrower’s age, type of work, source of income, type of residence, previously taken loans and their repayment history, etc. A person who is old and nearing retirement may not get a loan, or even if they do, the rate of interest will be much higher. They may also get a shorter tenure to return the borrowed money, resulting in paying a very high monthly EMI. Similarly, a person earning less will get a higher rate of interest on loans secured by the property as they pose a higher risk of non-payment for the lender.  

Type of Property

Lenders highly consider the type of property against which a loan has been applied. The lenders have surveyors who survey the property to check its type (whether residential or commercial), age, location and value in the current market. Based on the reports submitted by the surveyors, the lenders decide on the amount of loan that can be approved, the tenure of the loan repayment, and the rate of interest that can be offered to the borrower. Commercial properties and residential properties will have different loan amount eligibility and varied rates of interest. An old and worn-out building will have less property value and may result in getting a lower amount of loan approved and a higher rate of interest with a short repayment period. Whereas, a high-value property located in an upmarket area may result in getting the borrower a higher loan value with a much lower rate of interest. 

Loan Tenure

The tenure of the loan also determines the rate of interest that will be applied to it. These loans have longer tenures of repayment, like 15-20 years, because of which the rate of interest that is offered is lower. The borrower has the flexibility to pay the loan sooner by opting for a shorter tenure. However, in these cases, the lender usually applies a higher rate of interest on the loans secured against property. 

Tax Benefits

One of the most important factors to consider while applying for a loan against property is the inability to claim tax benefits. Unlike other loans, like education loans or home loans, where the user has the option to claim tax benefits, the borrower of a loan against property cannot claim any tax benefits from the government. The borrower will be required to pay taxes on the amount they are using to repay the loan. Hence, users are attracted more towards a home loan or an education loan for tax savings even though they attract a higher rate of interest compared to other loans.

To summarise 

The interest rate, loan tenure, processing fee, and other parameters of loans against properties offered by various lenders may differ greatly depending on the applicant's property, credit profile, and risk appetite. As a result, comparing loan options from as many lenders as possible is critical before deciding on one.