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84% of personal loans for wedding applications received in 2019 were from millennials in India. This was a 30% increase as compared to 2018 indicating that this generation is becoming more financially responsible with every coming year. Not only are they ready to finance their own wedding, they also don’t shy away from taking a personal loan to go on foreign trips, buy a new car or bike and even fund their higher education abroad.
However, it is also important to not only compare personal loan interest rates across various financial institutions such as banks and non- banking financial companies(NBFCs) but also understand what it costs to borrow and how it would impact your savings. Do not be misled by the ease of lending and supposedly lower interest rates, which might only cost you a higher amount in the long run.
Understanding the personal loan rate structure is important in order to demarcate a seemingly attractive yet costly loan from one which can be much more economical to you, a few years down the line.
Types of personal loan interest rates
A lender might either offer you a flat rate or a reducing balance rate. The latter is also known as effective interest rate. The personal loan rate structure for both of these is different and so is the computation of interest on the principal amount. Moreover, since the financial institution has the upper hand in deciding which rate structure to employ when disbursing a loan, you have little or no choice here and might have to comply with the rate structure dealt to you. Awareness on which one of these calculation methods helps you reduce the cost of your borrowing can help you ask the right questions so that you do not end up taking a loan that is financially unsuitable for you.
Flat rate
The interest payable for loan period remains the same in this personal loan rate structure. This is because it is calculated on the total principal with the yearly interest rate associated with it. For example, you want to avail a loan amount of ₹1 lakh to buy a new two wheeler at a flat interest rate of 10% per annum for 2 years. So the amount of interest is calculated as annual interest multiplied by the loan tenure, that is ₹10,000 X 2= ₹20,000.
The interest to be paid on the principal loan amount is predetermined here and so is the total amount that you pay over the loan period. The latter can be computed with a simple formula:
P+(P x R x T)/100 = A, where P is the principal borrowed, R is the interest rate of the loan, T is the loan tenure and A is the total amount that you need to repay. So the total repayment amount in this case can be calculated as 1,00000+(1,00000 x 10 x 2)/100 which equals to ₹ 1, 20, 000.
Reducing balance personal loan
Under this method, interest is not calculated on the total loan taken, but the outstanding amount that remains every time you have made an interest payment. Interest is computed on a monthly basis, on the amount left to be repaid after the deduction of the previous repayment. Hence, not only does the next principal amount keep decreasing, your interest also keeps reducing as you approach the end of your loan tenure. Your financial liability is much less in this method although the one above seems more simple and easier to calculate.
Let us assure you take out a loan of ₹1 lakh at a reducing balance rate at a rate of 12% for 2 years. Your first month EMI is predetermined at ₹10,000 which consists of the principal to be repaid as well as the interest amount. For the second month, interest is levied on the principal amount minus the amount repaid in the first month as EMI. This method applies every upcoming month till you have completely repaid your loan amount.
Most personal loan interest rates offered by private and public sector banks and other financial institutions follow the reducing balance system. More important than getting attracted by low interest rates, it is necessary to be sure that your loan provider is completely transparent about the costs incurred in loan payment. When you take a personal loan available on Finserv MARKETS, you can be assured that it comes with absolutely no hidden charges. Moreover, you have round the clock access to your loan account with a tap of your finger on your smartphone anywhere, anytime.
Personal loan interest rates available on Finserv MARKETS are competitive, so that the loan that you take does not become a liability in the long run. Convenient and quick online applications with minimum documentation, flexible loan tenures to choose from, faster approval and speedy disbursal make the loans on Finserv MARKETS ideal for borrowers. Experience seamless funding with a host of benefits only on Finserv MARKETS!
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