Financial institutions offer customers various kinds of loans to help customers take care of their financial needs. One of them is Loan Against Property, where one can get a loan by keeping your commercial/residential property as collateral.
Through Loan Against Property, you can avoid the high interest rate and longer tenure that comes with the loan and make your EMIs affordable. However, you always have the option to choose between the Fixed and variable loan option. Let us discuss the difference between the two and which one you should choose to get maximum benefits.
Where can the loan amount be used?
If you are opting for a Loan against property, then it is a secure loan that offers the freedom to use the loan amount for any purpose of your choice. Some of the common usages of the loan amount are:
- Wedding: You can use the amount for planning your wedding.
- Vacation: Any vacation in an exotic foreign location can be expensive, for such purposes, getting a loan against property offers you a good deal where you can use the loan for a holiday with family and friends without worrying about disturbing your savings or taking the burden of repaying the loan at once.
- Medical emergency: Medical emergency requires quick treatment, and is also very expensive. You can use the loan against property for this purpose and plan your expenses accordingly.
There are various other areas where you can use the loan against property. It is a financial option that takes care of all your expenses without drilling a hole in your pocket.
As the name suggests in this option, the interest rate of Loan Against property being offered for fixed at the time of loan approval. Throughout the tenure of the loan, the rate remains constant. No matter whether the market is going up or down, the interest rate remains the same.
- The market conditions do not impact the interest rate and EMIs.
- The certainty of loan repayment, make it easy to plan expenses accordingly.
- The fixed rates charged by financial institutions are usually higher.
- The monthly EMI increases.
- You can be charged a penalty for foreclosure of the loan.
Based on the terms of agreement of the loan, the interest rate of the loan in case of fixed-rate remains the same, even if the market rate rises.
Flexible Interest rate
In some cases the interest rate of the loan charged on the outstanding balance varies based on market conditions, this is known as the flexible interest rate. The interest rate in such cases is charged on an underlying benchmark or index such as the federal funds rate.
- The interest rate offered is lower than that of flexed interest rate, thus lowering the EMI of the loan too.
- No extra charges for foreclosure or part pre-paying the loan.
- Reduces the overall amount of interest you’ll need to pay and ultimately scoring a better return on your investment.
- An increase in repo rate will affect the interest rate, making EMIs more expensive for customers.
- Causes financial uncertainty.
- The repayment amount fluctuates quite significantly throughout the mortgage, making it challenging to set – and stick to – an accurate budget.
If the market rates are on a decline then opting for the flexible interest rate is a smarter option.
Maximum financial institutions offer both floating as well as the fixed interest rate on loans. Some also offer the customers the freedom to switch between the two during the repayment against a fee. Therefore, it is important that you compare the terms of both and then pick the right lender to avail affordable interest rates on your loan.