Longer tenures, high loan amounts, and competitive interest rates are a few aspects concerning loans against property (LAP) that make them popular among individuals and businesses. These loans can help you meet all those financial requirements which a short-term loan cannot with affordable EMIs.
Lending institutions offer loans against property at fixed and floating interest rates. The type of affects your repayment plan and the EMI amount. Therefore, it is crucial to understand both interest rates. Before deciding on a fixed or floating rate for LAP, one should look at both rates’ positive and negative points.
What Does it Mean to Have a Fixed Interest Rate LAP?
A fixed interest rate means the lending rate remains unchanged during the loan term. The EMI due to the loan repayment remains constant. If the lender offers a LAP where the rate is fixed for a certain period of the tenure only, ask the lender about the reset clause. You can negotiate for the lock-in period – how long it will last with a fixed rate.
Key advantages of fixed interest rate
– The borrower can handle market conditions impacting the monthly payments.
– Since the interest remains fixed throughout the loan tenure and the EMI amount does not change, borrowers can plan their finances effectively. You can use a property loan calculator to know your interest rate and EMIs.
– Fixed lending rates bring a sense of security and certainty.
Drawbacks of fixed interest rate
– Fixed lending rates are usually higher by a few percentiles than floating lending rates.
– If the base rate of loans declines, borrowers will not be able to get benefits and will have to continue paying the same high EMI.
What Does it Mean to Have a Floating Interest Rate LAP?
Floating interest rates fluctuate during the loan repayment tenure based on market conditions and changes in the repo rate laid out by the RBI (Reserve Bank of India) repo rate. This lending rate is typically lower than fixed rates by 1-2%. The index and the spread are the two components of the floating lending rates. The index is a metric used to measure interest rates, and the spread is an additional fee that the lender adds to the loan cost to cover credit risk, profit markup, etc.
Key advantages of floating interest rate
– Since this loan against property interest rate is based on market conditions, it can benefit you if the market rates decline during the loan tenure.
– Even if the market rate increases, and you need to pay a high EMI with increased interest, you need not worry. Simply because it will only remain high for part of the loan tenure.
– Most lenders do not levy penalties on prepayment or foreclosure of loans offered at floating rates.
Drawbacks of floating interest rate
– Floating rates make it tough to plan your finances during the loan tenure.
– The floating lending rates are linked to market conditions, and it may end up paying larger EMIs that can disturb your repayment schedule.
Fixed or Floating: Which One Is Better?
When to choose Fixed Interest Rate for LAP –
– You can consider a fixed interest rate if you can remain comfortable with your loan EMI for the entire loan tenure. Keeping the loan EMI under 25% of your monthly income is good. It will help you ensure that you can pay EMIs without any delay.
– If you are more disciplined towards debt repayment and want to plan your finances, fixed interest rate LAP will work better for you. Estimate the interest amount using an online property loan calculator.
– If you want to avoid market risks associated with rising market rates, you may prefer fixed interest rates.
When to choose Floating Interest Rate for LAP –
– Choose floating lending rates if the base rate is expected to remain constant or reduce over time. The interest on your loan will either be the same or decrease ultimately.
– If you are expecting a rise in your income in the future, it is good to choose a floating interest. The lender allows you to make prepayments without additional charges helping borrowers to repay the loan faster and save on interest costs.
This way, you can decide on interest rates on LAP. Understand your finances and cash flow in the future, and find the best lending institution offering LAP at affordable interest rates.