Loans against property can cater to all your expenses which a short-term loan cannot. The high financing amount, longer tenors, and low interest rates help you meet your financial requirements as well as make the EMIs affordable.
Financial institutions disburse these loans within a few days to help you address emergencies. Lenders also offer you two types of interest rates: fixed and floating.
If you don’t know about fixed or floating interest rate and which is better, then you will know here what is floating interest rate and pros & cons of this. You must understand both of these to choose the better option between fixed and floating interest rates when you opt for the LAP.
Fixed Rate of Interest
Fixed rate of interest, as the name suggests, remains fixed throughout the repayment period. Hence, your EMIs also remain stable.
You don’t have to worry about market conditions affecting your EMIs, unlike with floating rates of interest.
Fixed rates charged by financial institutions are usually higher than the base floating rate by a few percentiles.
Floating Rate of Interest
Floating rate of interest fluctuates throughout the repayment tenor based on market conditions. This interest rate is based on the RBI’s repo rate. It decreases with the repo rate and vice versa.
One of the benefits of floating loan against property interest rates is that existing customers of a loan against property can enjoy lower home loan EMI compared to a fixed rate.
The RBI also decreases the repo rate which can lower floating rates even more. Note that repo rate was reduced twice in 2019.
Another benefit of floating rates is that you don’t have to pay any extra charges when foreclosing (clearing your loan before the tenor ends) or part pre-paying (paying a large portion of the loan to reduce either EMIs or tenor) the loan.
- Cons of Floating Rate
The opposite of the above can also happen. An increase in the repo rate will directly affect floating rates. In such cases, the EMIs will become more expensive for customers.
However, the increase may be temporary as RBI revises the repo rate every quarter. Also, it does not impact the entirety of your loan tenor as it is only short-term.
Example to Understand Fixed or Floating Interest Rate Which is Better
You have availed a loan against property of Rs. 35 Lakh with a 15 years tenor. The home loan EMIs will be Rs. 39,000 (approx.) with an 11% floating interest rate and Rs. 42,000 (approx.) with a 12% fixed interest rate.
Impact of Tenor on EMIs and Total Payable Interest
Do note that a longer tenor decreases the EMIs but increases the total payable interest. A shorter tenor does the exact opposite.
For example, your total interest payable is Rs. 36 Lakh for the above loan with 11% rate of interest. The same becomes Rs. 28 Lakh if the loan tenor reduces to 12 years. However, your EMIs increase to Rs. 43,000 (approx.) on that loan.
Hence, it is recommended to use a loan EMI calculator to calculate your EMIs and decide the tenor before you apply.
Fixed or Floating: Which one to Go for?
The majority of financial institutions offer both floating and fixed interests on a loan for house property. You also get the option to switch between the two during the repayment against a fee.
Make sure to compare and pick the right lender to avail affordable rates of interest on your loan against property.
Bajaj Finserv is an NBFC providing floating interest rate Loans Against Property of up to Rs. 3.5 Crore with tenors up to 20 years.
They also provide pre-approved offers that reduce time taken to avail finances by making the process simple and easy.
Now that you know fixed or floating interest rate which is better, you are ready to apply for the loan. You can do so online thanks to NBFCs and fintech companies. Make the best of lower repo rates with floating interest LAPs.