Financial challenges are an integral part of life, especially for the self-employed and owners of micro-businesses across India. From personal aspirations like renovating homes to professional pursuits like business expansion, various demands necessitate financial assistance. A viable solution that can be tapped for such needs is the Loan Against Property (LAP). However, one common pain point encountered in availing of this facility is the seemingly high loan against property interest rates and the complex process involved in negotiating these rates. This article aims to alleviate these concerns by introducing the dos and don’ts of negotiating LAP interest rates.
Understanding Loan Against Property (LAP)
LAP, as the term suggests, allows you to avail a loan by mortgaging your property. While the property is mortgaged, you still retain the ownership and can continue using it. One significant aspect of LAP is the interest rate attached to it.
The interest rate can substantially affect your loan tenure and equated monthly instalments (EMIs), thus making it crucial to negotiate the most favourable rate possible. High-interest rates can considerably increase the overall cost of your loan. Hence, being able to negotiate a lower rate is vital in managing your debt and ensuring loan affordability.
The Dos of Negotiating LAP Interest Rates
While planning to apply for a loan against property, consider the following steps for negotiating better interest rates:
- Proper Research: Begin by comparing different Non-Banking Financial Companies (NBFCs) and their loan against property interest rates. Use online platforms to gather information about the prevailing rates and terms of different lenders.
- Understanding Your Credit Score: Your Credit Information Bureau (India) Limited (CIBIL) score can significantly influence the interest rates offered by lenders. Maintain a score above 700 to improve your chances of securing a lower interest rate.
- Employment and Income Stability: Regular income gives lenders confidence about your loan repayment capacity, hence potentially contributing to a lower interest rate. Demonstrate a steady income flow through your income tax returns.
- Property Valuation: The loan amount and interest rate largely depend on your property’s value. Ensure you get a fair and accurate valuation of your property before proceeding with the loan negotiation.
- Floating vs Fixed Interest Rates: Fixed rates remain constant while floating rates vary with market conditions. Depending on the market trends, decide whether a fixed or floating rate would suit your needs better.
- Professional Help: Consider availing the services of a financial advisor when negotiating interest rates. They can offer valuable insights and help you secure the best terms.
- Top-up Loans: If you’re an existing borrower, consider the option of a top-up loan, which may offer lower interest rates compared to a fresh LAP.
The Don’ts of Negotiating LAP Interest Rates
While it’s essential to understand the dos, be aware of the following don’ts when negotiating loan against property interest:
- Avoiding Assumptions: Don’t assume a lower interest rate based solely on your CIBIL score. Though a good score enhances your credibility, it does not guarantee a lower interest rate.
- Ignoring the Fine Print: Never overlook the terms and conditions of your loan agreement. It contains crucial details about the interest rate, repayment terms, and other charges associated with the loan.
- Neglecting Additional Costs: Remember to factor in additional costs such as processing fees, legal charges, and foreclosure charges. These costs may increase the overall cost of your loan, irrespective of a low-interest rate.
- Overlooking Your Repayment Capacity: Negotiating a lower interest rate should not make you overlook the loan tenure and your EMI affordability. Opting for a longer tenure may reduce your EMI but increase the overall interest payout.
- Misjudging the Market Trends: Don’t opt for fixed rates without analysing the market trends. Fixed rates can be risky in a falling interest rate market, as you might end up paying more.
How to Prepare for Negotiations
When you are ready to apply for loan against property, follow these steps to prepare for negotiations:
- Gather Relevant Documents: These include proof of income, property documents, and CIBIL score reports. Lenders consider these documents while determining your eligibility and interest rates.
- Improve Your CIBIL Score: Pay your bills and EMIs on time, keep your credit utilization low, and avoid too many loan inquiries to improve your CIBIL score.
- Evaluate Your Repayment Capacity: Use online loan calculators to determine your EMI and ensure it does not exceed 40% of your income.
Role of Co-Borrowers in LAP
In LAP, you can include co-borrowers to increase your loan eligibility and possibly secure lower interest rates. However, they should have a stable income and a good CIBIL score.
- Income Consideration: The combined income of co-borrowers is taken into account, which increases your loan eligibility and may lead to a lower interest rate.
- CIBIL Score: A co-borrower with a high CIBIL score can improve your credibility, thus potentially leading to lower interest rates.
Conclusion
While availing of a LAP can help meet your financial needs, negotiating for a favourable interest rate is crucial to ensure loan affordability. A mindful approach towards the dos and don’ts of negotiation, coupled with proper preparation, can help you secure the best terms for your LAP. Your ultimate goal should be to strike a balance between securing the funds you need and ensuring you can comfortably repay your loan without straining your finances.
