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Personal Loan Interest Rate and Charges

With a Personal loan, you can fund your dreams of going on a vacation, providing best education to your children, refurbishing your home and much more. Personal loan serves as a relief to the borrowers as there is no collateral involved. Today, Personal Loans come with benefits like quick approval, minimal documentation requirements and rapid disbursal. However whenever applying for a personal loan, always look for the interest rates & charges that come with it. The personal loan interest rate and charges may vary from lender to lender.. Hence, have a fair knowledge of the same and then apply for a Personal Loan.

Factors Affecting Personal Loan Interest Rates

There are various factors that affect the Rate of Interest on Personal Loans. Having a fair idea about these factors will help you in the long run.

Income

Having a stable source of income, gives the bank an assurance that you will be able to pay the loan. Higher the income, more are your chances of getting the Loan at an attractive interest rate.

Repayment History

Having a good record of repayment, definitely helps you in fetching a good Personal loan. This is because a good repayment history, means that you will be able to repay the loan in the stipulated time period and not default. This can, thus, significantly affect your Personal Loan interest rate.

Relationship with your Bank

The kind of relationship you share with the bank can also affect the Personal loan interest rate. Having a saving account with the bank can be an added advantage. Depending on your Credit Score and relationship, you can negotiate for better loan deals, offers. The bank, depending on your relationship and negotiation skills, can consider a lower rate of interest for you.

Impact of Credit Score on Personal Loan Interest Rates

Credit Score Range

Impact

750 & Above

The credit score in this range indicates that the borrower has successfully repaid the loan amount in the specified loan tenure. You can get loans of greater amounts at attractive interest rates.

700 – 749

The borrower in this credit range can get the loan but it may come with some reservations. Not all the benefits will be offered. The lender can have second thoughts on giving you the loan at lower rate of interest. However, chances of loan application getting rejected are not that high.

650 – 699

This range indicates the average performance of the borrower in repaying the loan and any other dues. Chances of getting a loan are a little less. Even if you get the loan, higher rate of interest will be charged.

550 – 649

There is very little chance of getting a loan, if your credit score falls in this range. Lender will consider your profile highly risky and that you are sure to default on payments.

Fixed Interest Rates vs Floating Interest Rates

There are two different kinds of Personal Loan Interest rates. Fixed Interest Rates and Floating Interest Rates.

In case of Fixed Interest Rates, the rate of interest charged on the Personal Loan amount would be constant throughout the loan repayment period. You will know how much to pay and thus you can plan your monthly payouts and budget accordingly.

The Floating interest rate, depends on the Marginal Cost of Lending Rate(MCLR) which is the base rate set for banks by RBI. With changes in MCLR, the interest rate also gets revised. With lower interest rate , the repayment amount also reduces.

Interest Calculation Methods

There are two methods to calculate interest: Flat rate method and Reducing balance method.

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

Flat rate of interest can be calculated as:

EMI = (Principal + total interest payable) / loan tenure in months

Where total interest payable = P x r x n/100

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

The formula to calculate interest rate basis the reducing balance method is

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

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

 

Interest Rates for Different Applicant Types

The personal loan interest rates depend basically on the profile of the applicant. Income, credit history, relationship with the lender are some basic factors that influence the interest rates on the Personal loan.

Salaried/Self-employed Professionals:

Applicants belonging to this category have higher chances of availing the loan. This is due to the fact that their income is usually stable especially salaried applicants and they have the ability to repay the loan within the repayment period. Hence, they can get a loan of higher amounts and at attractive interest rates.

Women:

In order to empower women and help them become financially stable, many banks and NBFCs offer Personal Loans to women at a lower rate of interest. Financial institutions like Bajaj Finserv already provide Personal loans for women for their financial requirements.

Pensioners:

Even pensioners can apply for a loan, specially curated for them at a reasonable rate of interest. This facility is usually available with the lender with whom their pension is associated.

How to get low interest rate on personal loan?

The following are the things to keep in mind to get low interest rate on personal loan

  • Maintain a good credit score for low rates and faster loan approval
  • A credit history with timely repayment of loan
  • Compare interest rates and look out for festive offers before availing a loan
  • Check the interest calculation method to ensure you are paying low interest on the loan amount
  • The employer's credibility is an important factor to get you favourable deals.
  • Your employment history and stability helps in building a good credit score which partly impacts the interest rates.

Personal Loan Balance Transfer Rates

In a Personal Loan balance transfer, you transfer your existing personal loan account with an existing lender to a new lender for better terms and interest rate. This way, a loan balance transfer allows you to save on the interest payable on the loan.

For example: if you transfer your existing personal loan of Rs. 10 lakh@15% for 48 months after 12 months to another bank offering a lower rate of interest @13% p.a. for the remaining tenure of 36 months, then you will save Rs. 22,313*.

Given below is an example of the example of banks following a reducing balance method of interest calculation on personal loan.

Particulars

Original Loan Parameters

Balance Transfer (BT) Parameters

Outstanding Loan amount

10,00,000

9,01,106

Loan Tenure

48 months

36 months

Interest Rate

15%p.a.

13%p.a.

EMI

Rs. 27,830

Rs. 30,361

Total interest payout

3,35,840

1,91,890

Savings

-

Rs. 22,313

Manage all your queries here

✔️How to calculate personal loan interest rate?

You can check the personal loan interest rate using the EMI Calculator available on the website or online portal of the lender.

✔️What is the processing fee for personal loans?

The processing fee is usually 1.00% to 2.50% of the loan amount.

✔️ What is the pre closure charge for personal loans?

It is usually 4% with applicable taxes on the outstanding principal.

✔️What is repo rate and how does it affect personal loans?

Repo rate is also known as “Repurchase Rate” which is the rate at which the Reserve Bank of India (RBI) lends money to commercial banks against collateral such as government securities. Repo Rate reduces the influence of the rate of interest on Personal Loans.

✔️How often does the variable or floating interest rate change?

Each time the MCLR (Marginal Cost of Funds based Lending Rate) changes, floating interest rate changes.

✔️How do I benefit if the interest is calculated on a daily/monthly reducing balance?

You can benefit from it as the overall interest that you need to pay will be comparatively lesser.