If you are planning to get a personal loan, one of the most important factors to consider is the interest rate charged on these. It plays a massive role in determining your EMI and largely impacts the overall cost of your loan.
Stay informed about the current personal loan interest rates, as these can help you better plan your finances. Here is a small guide to help you understand the role personal loan interest rates play in your borrowing journey.
What is a Personal Loan Interest Rate?
An interest rate is the amount charged by the lending firm for borrowing money. This value is usually represented in the form of a percentage of the amount borrowed. For example, let us consider you have taken a personal loan of ₹5 Lakhs and the rate of interest, charged by the lender, is 10%. In this case, the interest you are liable to pay amounts to roughly ₹50,000.
Interest charged, usually adds to your existing When getting a personal loan, you are usually asked to choose between two types of interest rates, i.e., fixed and floating. Let us understand these two in further detail.
| Fixed Interest Rate | Floating Interest Rate |
| The lending rate is fixed for the entire loan tenure | The lending rate is subject to regular revisions as per changes in the MCLR |
| Usually, 1% to 2% higher than a floating interest rate | Usually, 1% to 2% lower than a fixed interest rate |
| Borrowers may be required to pay additional charges when opting for prepayment | Borrowers are not required to pay additional charges when opting for prepayment |
| Suitable for short-term loans ranging from 3 months to 10 years | Suitable for long-term loans ranging from 10 to 40 years |
| Recommended for borrowers, who prefer stability and planning their finances beforehand | Recommended for borrowers, who have a substantial risk appetite |
What Impact Does The Interest Rate Have on Your Personal Loan?
It is essential to keep monitoring current personal loan interest rates as it is a smart move for anyone looking to borrow funds. This is because these make up a huge portion of your monthly instalments and add to the aggregate cost of your loan. Let us understand this better with an example.
Suppose, you took a personal loan of ₹10 Lakhs, at an interest rate of 10%. In this case, the interest you are liable to pay along with the principal amount to close the loan, amounts to approximately ₹1 Lakh. Now, presume that the interest rate is 15%. Here, you will be required to pay about ₹1.5 Lakhs as interest for the same ₹10 Lakh principal amount.
In addition to this, the decision of the type of interest rate can also be a major factor in determining the cumulative cost of your borrowing. Fixed interest rates offer stability and stay fixed throughout the tenure. Meanwhile, floating interest rates are usually lower than fixed rates. They change as per revisions in the MCLR, which is heavily influenced by market changes. It is important to carry out extensive research before opting for either. This ensures that you make the most of your loan without losing out on too much money.
Tips To Get Personal Loans at Favourable Interest Rates
Now that we have understood the need for favourable interest rates, it is time to apply. But before you do so, look at this list of tips that may help you get a personal loan at comparatively lower interest rates.
- Loan Amount & Tenure
It is important to take a loan of only the required amount and repay it as soon as possible. This is because a longer tenure and a larger loan amount might result in a higher interest rate.
The risk associated with lending huge amounts of money for a longer period of time is large for the lender. Hence, to compensate for the high risk, financial institutions may charge you higher interest.
- Credit Score
Your credit score is one of the most important factors taken into account by lenders when deciding on an interest rate to offer you. This score is computed on the basis of your credit and repayment history by credit bureaus like TransUnion CIBIL. These usually range between 300 and 900.
A score of 700 and above is considered to be a good credit score. The higher the score to more likely you are to be offered a lower interest rate. Hence, it is essential to maintain a good score to prove your creditworthiness by making timely repayments of existing loans and credit card bills.
- Research & Compare
One of the most tried and tested methods we use even today is to compare and choose. Do the same when it comes to your personal. Keep track of the current personal loan interest rates offered by multiple lenders and compare them to find the plan that suits you the most.
Monitoring term loan interest rates can help you make better decisions. It will be especially helpful when selecting between a fixed and a variable interest rate. Extensive research can help you understand the trend in market rate change. Using this information you can get a loan at the most optimal time at beneficial terms.
- Income & Employment
Another factor which clearly shows your repayment ability is your income. When offering a loan, lenders usually look at your bank statements and income source. This assures them of your ability to repay the borrowed amount.
Your monthly earnings and the type of employment are essential in determining your ability to afford the loan. The eligibility criteria and terms of the loan may differ depending on whether you are salaried or self-employed.
- Debt-to-Income Ratio
The number of ongoing debts and liabilities can cause you to shell out more money for your new personal loan. Your Debt-to-Income (DTI) ratio indicates how much the borrower has to repay as against how much they earn. If the DTI is high, it is possible that you will be asked to pay more interest when getting a new loan.
Thus, it is advisable to close as many loans as possible before getting a new one. This helps you make sure that you can take a new loan and repay it on time without facing too much financial pressure. A lower DTI can qualify you for a lower interest rate.
Make sure to keep an eye on the current personal loan interest rates and get a loan when the market conditions are in your favour. As per your financial requirements, choose between fixed and variable interest rates. You can also use an EMI calculator to understand the impact of your term loan interest rates on your finances. Also, use the tips discussed here and get a loan that fits right into your budget and fulfils your needs!
