A Loan Against Property (LAP) is a popular financial tool that enables individuals to borrow funds by pledging their property as collateral. It offers quick access to capital at comparatively lower interest rates than unsecured loans.
However, interest costs can accumulate over time, making it crucial for borrowers to adopt strategies to reduce them. Knowing smart tips to minimise the interest burden on your LAP can make a significant difference in long-term financial planning.
How to Reduce Loan Against Property Interest Costs?
Here are some tips and strategies you can use to reduce your LAP interest costs:
Opt for a Shorter Loan Tenure
One of the most effective ways to reduce your LAP interest costs is by opting for a shorter loan tenure. While this increases the EMI, it significantly reduces the total interest paid over the life of the loan. For example, a ₹50 Lakhs loan with a 15-year tenure might have an EMI of ₹60,000, whereas the same loan with a 25-year tenure could bring down the EMI to ₹45,000, but the total interest paid would be much higher.
Choosing a shorter tenure is often the best option if you can comfortably manage the higher EMI. It not only reduces interest costs but also helps you clear the debt faster.
Maintain a Good Credit Score
Your credit score plays a vital role in determining the interest rate you will be offered for a LAP. Borrowers with higher credit scores (750 and above) typically qualify for lower interest rates, as they are considered less risky by lenders. Conversely, individuals with lower credit scores may be charged higher interest rates due to the perceived risk of default.
If your credit score is low, consider improving it before applying for a LAP. Pay off existing debts, avoid missing bill payments, and reduce your credit card usage to boost your score. Even a slight improvement in your credit score can lead to lower interest rates.
Negotiate with Lenders
Don’t hesitate to negotiate with lenders to secure better terms, especially if you have a strong credit history or are borrowing a large amount. Lenders may lower interest rates or adjust repayment terms to earn your business. Having competitive offers from other financial institutions strengthens your position during negotiations.
For instance, if you are considering a loan against property from PNB Housing Finance Limited, you may find that the PNB loan against property product offers competitive interest rates and flexible repayment options. By comparing this with offers from other banks and NBFCs, you can make a more informed decision and choose the most cost-effective deal, ultimately reducing your long-term interest burden.
Opt for Floating Interest Rates
Many lenders offer LAPs with floating interest rates. These rates fluctuate based on market conditions, typically linked to a benchmark rate such as the MCLR (Marginal Cost of Funds Based Lending Rate) or the base rate. If you’re planning to repay your loan early, opting for a floating rate could help you save on interest costs.
A floating rate is usually lower than a fixed rate. When market rates drop, your interest rate will also decrease. However, it’s important to consider that rates can rise too, potentially increasing your EMI.
Why It’s Crucial to Compare Loan Against Property Interest Rates?
Before committing to a LAP, it’s essential to compare loan against property interest rates from various lenders. Many financial institutions, including banks and non-banking financial companies (NBFCs), offer LAPs with different terms and interest rates.
A comparison can reveal lenders offering competitive rates, which might lead to substantial savings over the long term. For instance, if you borrow ₹50 Lakhs for 20 years at 10% interest, your EMI might be ₹48,000. But if you secure a loan at 9%, your EMI could drop to ₹45,000, saving you ₹3,000 every month and ₹72,000 annually.
Consider Refinancing or Balance Transfer Options
If you’ve already taken a LAP but are struggling with high-interest rates, refinancing or a balance transfer could be a viable option. Many lenders allow you to transfer your loan to another bank or NBFC offering lower interest rates. This can result in reduced EMIs and overall interest costs.
However, refinancing comes with certain fees and charges, so it’s essential to carefully assess whether the long-term savings outweigh the costs of transferring the loan. Some lenders also offer balance transfers at reduced processing fees, so it’s worth exploring these options.
Conclusion
Reducing the interest costs on your loan against property requires careful planning and research. By comparing interest rates, choosing the right loan tenure, maintaining a good credit score, and negotiating with lenders, you can save a significant amount over the course of the loan.
