Understanding Personal Loan Interest Rates

Posted on Monday, February 26th, 2024 | By IndusInd Bank

Access to financial assistance is easier with the availability of personal loans. With just a few clicks or taps, you can apply for a personal loan to fund your dreams, tackle unexpected expenses, or consolidate debts. However, the convenience and speed of obtaining these loans should not overshadow the importance of understanding one crucial aspect: interest rates.

While applying for a personal loan may seem straightforward, grasping the ins and outs of personal loan interest rates is vital for making informed financial decisions. Why should you bother with interest rates when securing a loan is easy? Let’s dig deeper into this question.

All About Personal Loan Interest Rate

Simply put, a personal loan interest rate determines the cost of borrowing money from a lender. It’s the percentage of the loan amount you’ll pay back in addition to the principal amount borrowed. In other words, a loan Interest rate represents the compensation for the risk lenders take. For example, if you borrow ₹100,000 with a 10% interest rate, you’ll repay ₹110,000 in total.

The higher the loan interest rate, the higher the total repayment. This can be considered the reason why people look for the lowest interest rate on a personal loan.

At What Rate Do You Need to Pay Personal Loan Interest?

The interest you pay on a regular or instant personal loan is typically calculated using one of two methods:

1.   Flat interest rate

 A Flat Interest Rate refers to a lending rate that remains constant throughout the loan term. The interest is calculated for the entire loan amount at the start of the loan period. The financial organisation determines the repayment schedule and the EMIs payable by the borrower. It also keeps a borrower’s overall payback liability fixed and makes it easier to arrange finances in advance.

2.   Reducing balance interest rate

Another type of personal loan interest is the reducing or variable interest rate. This type of interest rate changes regularly and stays aligned with the changes made by the Reserve Bank of India in the repo rate. A reducing or variable interest rate is also known as an adjustable interest rate.

Also Read: Eligibility Criteria to Apply for a Personal Loan for Salaried Employees

3 Things That Affect Personal Loan Interest Rates

1.   Credit score

Your credit score is your financial report card. It reflects your creditworthiness based on your past borrowing and repayment behaviour. Lenders/lending institutions take this score into consideration to assess the risk of lending to you. A higher credit score indicates a lower risk, which can lead to lower personal loan interest rates, while a lower score may result in higher rates.

Keeping a good credit score involves timely bill payments, maintaining low credit card balances, and refraining from excessive borrowing. This will also help you access quick personal loans whenever you face a financial crunch.

2.   Income and employment stability

Lenders also seek assurance that you’ll be able to repay the loan on time. This is where your regular income and employment stability play a significant role. A consistent income and a stable employment record signal financial stability, decreasing lenders’ risk and possibly leading to lower interest rates. On the other hand, irregular income or frequent job changes may lead to higher rates as lenders perceive higher risk.

If you can envision the need for a personal loan in the time ahead, you can focus on maintaining a regular stream of income from the same/similar employer.

3.   Loan amount and tenure

The interest rate is influenced by both the loan amount and its duration. Higher loan amounts or longer repayment periods usually result in higher interest rates. This is because longer tenures expose lenders to greater risk, while larger loan amounts may require more resources from the lender, warranting a higher interest rate to compensate. This is where you need to strike a balance between the loan amount and tenure.

Ready to take the next step towards achieving your financial goals? IndusInd Bank is here to help. Explore IndusInd bank personal loan options and apply online today to take advantage of competitive interest rates.

Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.