Published on June 23rd, 2022
A loan against property (LAP) is a secured loan that is backed by your pre-owned residential or commercial property. As these are secured loans, they involve lower interest rates, higher loan amounts, and higher tenures.
When availing a loan against property, you can usually opt for two different types: fixed rate loan or floating rate loan. The option you choose can have a lasting impact on your finances as they affect your monthly instalments and as a result, the total interest you end up paying over the loan’s tenure.
In this blog, let’s understand the differences between these two types of LAPs and what factors you would need to consider before choosing one over the other.
Floating Rate vs Fixed Rate Loans
A fixed rate loan is one where the interest rate over the loan’s tenure stays constant and is decided at the time of availing the loan. So, it doesn’t matter if in the future interest rates on loans fluctuate, you will end up paying the same monthly amount irrespective.
This feature of fixed rate loans is quite attractive to many because of the certainty that you get with respect to your finances. You can plan and budget your finances much better if you know your monthly EMIs beforehand.
Floating rate loans don’t offer the same certainty but have their own advantages. In floating rate loans, the interest rate is made up of two components. First is the variable component, which is your lender’s benchmark rate.
This rate keeps on fluctuating based on market conditions and has a direct consequence on your loan’s interest rate. The second is the fixed component, which is called the risk premium. This depends on your specific credit profile.
As a result of the variable component, the interest rate and monthly EMIs on floating rate loans keeps on fluctuating as interest rates in the market fluctuate. This means that you will have to give up on certainty. However, if market interest rate in future decline, you will end up saving money on your floating rate loan. This goes both ways, however.
Factors To Consider Before Deciding Which One To Go For
As already mentioned, fixed rate loans come with a certainty that your loan’s interest rate and your monthly EMIs will remain constant over the entire loan’s tenure. This lets you budget and plan your finances better. You won’t have this luxury in case of floating rate loans.
Future Interest Rate Outlook
If you think that there are chances that the interest rates will go down in the future, definitely choose a floating rate loan. This is because as interest rates go down, your lender’s benchmark rate will go down, and so will the interest rate on your LAP.
On the other hand, if you believe that interest rates will go up, a fixed rate loan is a much better bet as with a fixed rate loan, you lock-in your loan’s interest rate at the time of availing the loan.
Current Interest Rates
Another factor to consider is the current interest rates and more specifically the difference in current interest rates between fixed and floating rate loans.
Usually, fixed rate loans will carry a higher interest rate as compared to floating rate loans. This is the premium that you pay for the certainty that fixed rate loans carry. If the difference between interest rates is considerable, you might want to opt for a floating rate loan.
However, don’t let this be the only deciding factor. If interest rates jump up considerably in the future, you might end up paying more on your floating rate loan even if currently it carries a much lower interest rate.
With LAPs, you can avail a higher amount of loan at lower interest rates. Whether you opt for a fixed rate or floating rate loan is a very important decision that you will need to make when availing the loan. Make sure to consider the above-mentioned factors when making this decision.
If you are looking for a loan against property at the best-in-class interest rates, do check out IndusInd Bank’s LAP offerings. Besides getting the lowest market interest rates, IndusInd Bank LAP has many other features such as higher loan amounts, flexible repayment tenures, and a hassle-free online application process. For more information, visit IndusInd Bank’s website.