Personal loans help you to tide over a contingency. Like all loans, you will have to pay an interest for the sum borrowed. In exchange of lending you the money, the bank collects an interest based on a predetermined rate known as a base rate which is fixed on annual basis. The banks break up the loan repayment in installments where the principal and the interest rate of the loan are reduced over the period of the loan term. The banks follow the base rate system which is the minimum rate of interest that a bank can charge from its customers. The interest provides a certain compensation for the risk borne by the lenders. Personal loan interest rates vary depending on a number of factors.
Facts about Interest Rates
Your credit score plays a critical role in determining the interest rate. You can get good personal loan interest rates if you have good credit score.
The interest rate and the amount of the total interest paid are higher when the loan is repaid over a large number of installments.
Interest rates are usually higher for unsecured loans and lower for loans secured by collateral.
Banks usually offer personal loans at fixed rates and variable rates. A fixed rate will have the same monthly payment for the life of the loan. A variable interest rate varies and changes in relation to the base rate of the bank. It may cause the monthly repayment amount to go up or down.
The interest rates of a personal loan can vary depending on the income, the credit status, your relationship with the bank, etc.
Factors affecting interest rate of personal loans
While applying for a personal loan, it is necessary to know what affects its interest rates. A bit of preparation will enable you to meet the requirements to get a personal loan with a low interest rate.
Inflation: Interest rates are strongly influenced by the condition of the economy. When there is inflation, borrowers can expect high interest rates
Credit history: Interest rates will be lower if you have a good credit history. If you have defaulted on previous loan repayments, you will have a lower credit score. This will cause the interest rate charged to be higher.
Age: Your age is a factor that influences the bank’s assessment of your loan eligibility and the interest to be charged.
Job stability: The bank could offer a lower interest rate if you have a steady income.
Loan amount: A sizable loan amount can get you discounted interest rates.
Loan duration: Interest rate is relatively low for a short repayment period and higher rate will be charged for longer repayment period.
Your relationship with the bank: It is better to approach a bank with which you have an existing business relationship and the customer service officers are known to you. If the bank is comfortable in dealing with you and have had no previous issues with you, then it will offer you better interest rates.
Inflation: When there is inflation, consumers must expect high interest rates
While taking a personal loan, always compare the interest rates that the banks offer, so that you can get an offer which will be best for you.