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Personal Loan Interest Rate


An interest rate is a percentage of a loan's principal that a lender charges a borrower. Loan interest rates are typically expressed as an annual percentage rate (APR) on an annual basis.  An applicant's interest rate on a personal loan will depend on several factors, including credit score, income, occupation, and other factors. One should compare as many personal loan interest rates as possible to choose the most appropriate and most suitable loan offer.

Buying a home, funding a project, investing in a business, or paying for college tuition are all instances in which people borrow money. In order to expand their operations and fund capital projects, businesses take out loans to buy long-term assets such as land, buildings, and machinery. In either case, borrowed funds are repaid by a predetermined date or over time in instalments.

Types of Interest Rates

Interest Rates are of two types.

Fixed Interest Rate: - Personal loans with fixed interest rates guarantee a constant rate of interest throughout your loan. It is relatively more expensive to pay fixed interest rates than floating interest rates. As well as showing you how much you have to pay back during the loan term, it also shows the certainty of your loan EMIs in advance.

Floating Interest Rate: - A personal loan with floating interest rates usually means the interest rate can change during the loan term due to varying lending rates. You must be prepared to deal with any changes in the interest rate during the term of the loan. If you choose a Personal Loan with a floating interest rate.

What affects the interest rate of a personal loan?

 · Income: - The applicant's income is considered by loan providers when determining the interest rate. A higher income might make a bank more willing to offer a lower interest rate to individuals with a high income. Those with lower incomes may be charged a much higher interest rate.

· Employer Details: - Working for a reputable company can result in a lower rate of interest.

· Employment Type: - Applicants may be offered different interest rates depending on whether they are self-employed or salaried.

· Age: - A loan provider's interest rate can also be affected by the applicant's age. An increase in interest rates may be applied to those who are nearing retirement age.

How to get Lower Interest Rate?

Credit Score: - A higher credit score indicates you are more creditworthy. Financial institutions offer personal loans at the lowest interest rates to individuals with good credit scores. If you are applying for a personal loan, it is advisable to check your credit score first. If you have a credit score below 750, you should work on improving it. Having a credit score over 750 increases your chances of getting a low-interest personal loan.

Missing Repayments: - Defaulting on a loan or credit card repayment can negatively affect your credit score. Before determining the interest rate on your loan, financial institutions usually consider your repayment history. Those who have paid their EMIs and credit cards on time in the past will likely receive low-interest rates.

Offers by the bank: - The interest rates offered by banks and financial institutions during festive periods are usually restricted to a short period. When applying for a loan, you may be able to get a lower rate if there is a current offer.

Compare Interest Rate: - If you are considering taking out a personal loan, you should compare the interest rates offered by different banks before applying. As a result, you can obtain a personal loan at a competitive interest rate.

Some fees & charges

· Processing charges for processing your application for the loan.

·Verification charges for verifying your background and other parameters.

· Government taxes like GST.

· If you fail to pay your EMIs on time, you will be charged late payment fees.

· You will have to pay a prepayment fee if you wish to prepay a portion of your loan.

· You will have to pay the foreclosure fee if you want to close your loan early.

Personal Loan

Types of Personal Loan Interest Rate

There are two kinds of Personal Loan interest rates: fixed and floating.

Fixed Interest Rate

Here, the rate of interest charged on the Personal Loan amount will remain constant throughout the loan repayment period. You know your Personal Loan EMI obligation at the start of the tenor, allowing you to plan your monthly budget accordingly.

Personal Loan
Personal Loan

Floating Interest Rate

Here, Personal Loan interest rates could change depending on changes to the Marginal Cost of Lending Rate (MCLR), which is the base rate set for banks by the RBI. With changes in MCLR, the interest rate on loans also gets revised. With a lower interest rate, the repayment amount also reduces. On the other hand, if the interest rates increase, your EMI obligation will also increase. A floating Personal Loan interest rate makes it difficult for you to ascertain your monthly financial obligation.

Personal Loan Interest Calculation Method

There are two methods to calculate interest: flat rate method and the reducing balance method.

In the flat interest rate method, the interest rate is based on the complete loan amount you pay during the repayment period. In case of reducing the balance method, the rate of interest on the Personal Loan will be considered and calculated on the basis of the outstanding loan amount.

Flat Interest Rate Calculation

EMI = (principal + total interest payable) / loan tenure in months i.e. total interest payable = P x r x n/100

Where, ‘P’ is the principal loan amount, ‘r’ is the rate of interest, and ‘n’ is the loan tenure in months.

Floating Interest Rate Calculation

EMI = [P x r x (1 + r) ^n] / [(1 + r) ^(n-1)]

Where, ‘P’ is the principal loan amount, ‘r’ is the rate of interest, and ‘n’ is the loan tenure in months.

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