A loan against property (LAP) is a great source of funds for any substantial financial requirements.
It has a lower interest rate compared to an unsecured loan as given against collateral.
Besides, this financing option is also beneficial for salaried employees as well. For instance, individuals can avail loan against property tax benefits and save on their taxable income when used for some specific purposes like home renovation and business.
Some loan against property advantages for salaried individuals are that they can get a higher loan amount and a longer repayment tenure as compared to other types of loans.
The tax benefits are also available on the amount paid towards interest. However, to avail the best interest rates, individuals need to be aware of the key factors that impact the rate.
Factors affecting interest rate of LAP for an employee
There are several key factors that affect loan against property interest rates, including:
1. Credit Score
Your CIBIL score plays a big role in determining your creditworthiness and therefore, how eligible you are for certain loans. Having a score of 750 or higher will not only make you more likely to be approved for a loan against property, but it could also help you get a lower interest rate.
2. Applicant’s profile
The following applicant profile factors influence the interest rate:
- Income – As a salaried employee has a fixed income, therefore, has a lower risk of default. Hence, interest rate on LAP for an employee is lower than for a businessman.
- Employment history – The employee should have been in employment for more than 3 years. However, the lender checks the stability of the job before approving a loan.
- Debt-to-income ratio – Low debt and high-income ratio translates into an affordable interest rate.
- Age – The age of the borrower should be between 20 – 60 years.
- Status of the Property – The value and location of the property will affect the interest rate given to the applicant.
The following factors help determine the LAP interest rate for an employee:
1. Location: A property’s location plays a big role in its commercial value. If a property is situated in a prime location with access to modern amenities, it usually qualifies for 65% to 70% of the property value as LAP.
2. Condition: The condition of the property is also taken into account when determining the interest rate. A property that is in pristine condition is more likely to fetch a higher resale value and interest rate than one that is in poor condition.
3. Age: Generally speaking, newer properties have better value and interest rates than older ones.
An employee can get the best interest rate against a loan against property by abiding by the following points:
- A longer repayment tenor incurs higher interest than a shorter one. However, if a lender perceives short tenor as risky, it may charge a higher interest rate.
- The employee should try to get a fixed interest rate instead of a floating interest rate.
- The loan amount and the repayment period should be in sync. A longer repayment period means higher EMIs and vice versa.
3. Improve credit score
There are a few things individuals can do to help improve their credit score. These include paying bills and credit card dues on time, limiting hard inquiries, and using less than 30% of the available credit limit. By following these practices, individuals can help improve their score.
4. Maintain good employment history
Individuals who are looking to take out a loan should also be aware that lenders prefer borrowers who have a stable monthly income. These borrowers are often rewarded with a more competitive interest rate.
In addition, individuals should also mention any additional income sources that they have in order to qualify for even better rates.
5. Maintain a good debt-to-income ratio
A FOIR below 40% is ideal if you want to get a favourable interest rate and have a higher chance of getting loan approval.
6. Research on best offers by various lenders
It’s important to check with various lenders and compare interest rates before making a decision on which one to go with. You can calculate the interest payable using an online EMI calculator and adjust the tenor (term of loan) accordingly.
Another thing to consider is whether you want a floating interest rate or fixed interest rate.
Usually, fixed interest rates are slightly higher than floating rates. But it’s important to weigh your options and decide what’s best for you based on your individual circumstances.
7. Right documentation
When applying for a loan, be sure to provide accurate information and the necessary documents. The interest rate and approval of your loan will depend on this evaluation.
8. Add a co-applicant
If you’re an employee applying for the LAP program, you can improve your eligibility by adding a co-applicant to your account. This will help increase your chances of being approved for the program.
9. Offer a valuable property
Individuals looking to apply for a loan against property should first assess the market value of the property to ensure they will be able to get the best interest rate. There are no restrictions on how loan against property funds can be used, so they can be utilised for both personal and professional purposes.
There are several factors that affect the interest rate of LAP; therefore, employees should be very vigilant and opt for the best deal after analysing all offers.
In addition to finding the best interest rate, employees should also consider income tax benefits on loan against property to ensure further savings on repayment.