Personal loans offer a flexible financial solution for a variety of needs, from handling medical emergencies to making significant purchases, all without requiring collateral. However, like all loans, they come with a cost- personal loan interest rates.
Interest rates influence both the overall cost of your loan and your monthly payments. Understanding how these rates are determined and what factors affect them can help you better prepare for your loan application.
In this article, we’ll dive into how interest rates are calculated, explore the factors that impact them, and provide tips on securing the best terms for your personal loan.
Read on to discover how to maximise your savings and make the most of your loan options.
What Are Personal Loan Interest Rates?
Personal loan interest rates represent the cost of borrowing that you’ll pay in addition to repaying the original loan amount (principal amount).
The interest rate is set by the lending institution and is influenced by several factors, including your age, income, credit score, loan amount, existing debts, and more. A lower interest rate means lower monthly payments and a reduced overall cost of borrowing.
Different Types of Interest Rates
Personal loan interest rates can either be fixed or floating. Let us understand both in detail:
Fixed Interest Rates:
These rates remain constant throughout the loan tenure, meaning your EMI payments will be the same each month. For example, if you secure a personal loan with a fixed interest rate of 13%, that rate will apply for the entire loan term, ensuring predictable payments.
Floating Interest Rates:
These rates fluctuate over time, based on market conditions, which means your EMIs can increase or decrease during the loan tenure. For example, if you take a personal loan with a floating interest rate starting at 13%, it may rise or fall depending on market trends. Your rate might drop to 12%, lowering your EMI, or increase to 14%, raising your monthly payment.
Personal loans usually come with fixed interest rates. It’s important to confirm the type of interest rate with your lender before signing the loan agreement.
How Do Personal Loan Interest Rates Affect EMI?
To understand how exactly personal loan interest rates affect EMIs, let us break down the EMI formula:
EMI= (1+r)n-1/P×r×(1+r)n
Where:
P is the loan amount (principal)
r is the monthly interest rate (annual interest rate divided by 12)
n is the loan tenure in months
Example:
Suppose you borrow INR 3 lakhs at an interest rate of 13% per annum (or approximately 1.08% per month) for a tenure of 60 months. Using the formula, the EMI turns out to be approximately INR 6,826.
Impact of Interest on EMI:
Small differences in rates can significantly impact the monthly payments. For instance, if the interest rate were 14% per annum, with the same loan amount and tenure, the EMI would increase to approximately INR 6,980.
Well-known financial institutions, such as SMFG India Credit, offer free personal loan EMI calculators, making it easy to compute and compare EMIs for different loan parameters.
*The EMI calculator provides only estimated values. The final interest rate and loan amount depend on your eligibility and the lender’s policy at the time of loan application.
Factors Influencing Personal Loan Interest Rates
The following factors influence interest rates on personal loans:
- Credit Score: A higher CIBIL score, generally of 750 and above, increases your chances for lower interest rates because it indicates strong creditworthiness. Lenders view you as a lower-risk borrower, making them more likely to offer favourable terms.
- Loan Tenure: Shorter tenures usually come with lower interest rates as the lender’s risk decreases with a quicker repayment period. Conversely, longer tenures reduce the monthly EMI burden but can lead to higher interest costs.
- Loan Amount: The amount you borrow influences your interest rate. Larger loans may attract higher rates due to the increased risk for the lender. It is essential to carefully analyse your needs and borrow only what you need to avoid undue financial strain.
- Debt-to-Income (DTI) Ratio: This ratio measures your monthly income against your monthly debt obligations. A lower ratio of 30% or below indicates a higher capacity for repayment, which can lead to lower interest rates.
- Employment Status: A stable source of income, such as a salaried job in a reputed organisation, shows your ability to repay the loan, reducing the lender’s risk. This can lead to favourable interest rates.
- Existing Relationship With the Lender: If you have an existing relationship with a lender and a strong repayment history, you may be eligible for preferential interest rates. Reach out to your current financial institution to see if you can benefit from lower rates due to your established history.
Strategies for Securing the Best Personal Loan Interest Rates
Here are some actionable tips to secure favourable interest rates on your personal loan:
- Boost Your Credit Score: Timely payments on existing EMIs and reducing credit card usage to 30% or below the available limit are two of the best ways to improve your score.
- Compare Lenders: Shop around and compare offers from different lenders. Look for trusted institutions such as SMFG India Credit that transparently list the interest rates and associated loan costs such as processing fees and prepayment charges.
- Negotiate Terms: Don’t hesitate to negotiate for lower interest rates, especially if you have a strong credit score and repayment history.
- Choose the Right Tenure: Select a loan tenure that aligns with your financial goals. Shorter tenures often have lower rates, while longer tenures can reduce monthly EMIs but increase overall costs.
- Clear Existing Debts: Paying off existing debts can improve your debt-to-income ratio and increase your chances of securing a lower rate.
Conclusion
Personal loan interest rates can be a key factor in minimising the overall cost of borrowing and managing your finances effectively. By understanding how interest rates work and the factors that influence them, you can make more informed decisions when applying for a personal loan. Whether it’s boosting your credit score, comparing lenders, or selecting the right tenure, taking proactive steps will help you secure the best possible terms.
SMFG India Credit’s personal loan EMI calculator can help you see the impact of different loan amounts, tenures, and interest rates on your repayment. This can help you estimate the most suitable loan option that comfortably fits your financial profile.
*The EMI calculator provides only estimated values. The final interest rate and loan amount depend on your eligibility and the lender’s policy at the time of loan application.
