"Understand the key factors behind fluctuating interest rates for loans against property. Learn more about these changes in our latest blog posts."
Published: 8 January 2025
Updated: 24 January 2025
A loan against property (LAP) is a good option if you need a large amount of money, whether for business, education, or any other emergencies. By using your property, residential or commercial, as security, you can get a bigger loan amount. Because it is secured, the interest rates are lower compared to personal loans, which makes it a popular choice among borrowers. While these loans become pretty common, there have been situations where most of us have witnessed changing interest rates for them with time. But what is the cause behind this? Let us find out why they keep on changing.
With the better reason behind the change of its interest rate, we can make better financial decisions. Whether you are planning to apply for a secured loan against property online or through a bank, the known reasons behind these changes can help you plan your finances better.
A loan against property is a secured loan where you give security as your property to the lender. Generally, these loans are provided at a lower rate of interest because the lender gets the security in the form of your property. In case you cannot repay the amount, the lender can recover it from the sale of your property.
If you’re planning to apply for a loan against property online, it’s important to know why interest rates may vary. Let’s explore the reasons behind these changes.
Interest rates on loans against property fluctuate from time to time. They can increase or decrease depending on many factors:
The loan against property's interest rates is heavily affected by the RBI's policy rates, mainly the repo rate.
The repo rate is the rate at which RBI lends money to commercial banks. The rising repo rate makes borrowing costly for the banks. So, they raise the interest rates of loans against property. When the RBI cuts the repo rate, the bank decreases the interest rates to make loans cheaper.
If your repo rate increases, it means the rate at which banks can lend loans against property also rises and so does your monthly instalment. Therefore, if you plan to apply for a loan against property, keep track of the RBI's announcements. It helps you plan your loan application when rates are a bit lower.
The financial market is competitive, and banks want to attract customers. To do so, they may adjust their interest rates.
To attract more borrowers, banks might offer competitive rates, especially if another bank offers a loan against property at a lower interest rate. This competition benefits borrowers, as it provides an opportunity to secure better rates. If you’re looking to apply for a loan against property online, it’s wise to compare rates across different lenders.
Frequent changes in interest rates can make it challenging to choose the best time to apply. However, if you keep an eye on offers and seasonal discounts, you might secure a loan at a lower interest rate.
Credit score is one of the prime factors that determine the kind of interest rate you might get when applying for any loan, be it loan against property.
A credit score is a three-digit number that reflects how creditworthy you are. It is calculated from your previous lending behaviour, the history of borrowing repayments, and how you actually manage your credits. The higher, the better-your chances of repaying the loan on time.
This is a score that helps the lender know the level of risk attached to lending money. A high credit score means a low-risk borrower in the eyes of the lender, and they can give you a loan against property at a lower interest rate. A low credit score means a higher interest rate because the lender views you as a risky borrower.
The rate of interest on a loan against property also depends on how much you borrow and how long you take to pay the loan back.
Generally, larger loan amounts might come with slightly lower interest rates since lenders see an opportunity to earn more over time. However, this depends on the lender’s policies and the borrower’s financial profile.
A shorter repayment period often comes with lower interest rates. This is because the lender's risk is reduced if the borrower repays the loan quickly. Longer repayment tenures may have slightly higher rates since the lender’s money is tied up for a longer time.
When deciding to apply for a loan against property online, think about how much you need and the period over which you want to repay it. A shorter tenure might mean higher monthly payments but a lower interest rate, which could save you money in the long run.
The nature and location of the property you take up as collateral highly influence the loan against property interest rate. Properties located in prime urban locations or well-developed areas have much more value and less risk than any other.
Properties in good locations are easier to sell when the lender wants to recover the loan amount; thus, they are at a lower risk. As a result, they might charge a lower rate. On the other hand, if the property is in a remote or less developed area, the lender might charge a higher rate because of the greater risk attached to it.
Using a well-located, high-value property can increase your chances of getting a loan against property with the lowest interest rate. It’s an important factor to consider when deciding which property to pledge as collateral.
The interest charged on a loan against property varies with changes in the RBI policy, competition in the market, and the credit score of the borrower as well as the value of the property. Based on this information, you should time your application in the right way so that you get it at a lower interest rate, whether done online or directly through a traditional bank.
With correct planning and awareness, the loan against property could be one of the most cost-effective means to achieve your financial goals, whether that's expanding a business, funding higher education, or managing medical emergencies. Just remember to always keep an eye on interest rates so that you can make the best out of your loan.
Also read: Top 10 Banks & NBFCs for Low-Interest Personal Loans in India
