Before applying for a Loan, ask if the interest rates are going up or down. The interest rate offered on your borrowing significantly affects the cost. As interest rates increase, your repayment amount also increases, and vice versa.
Personal interest rates depend on several factors, such as your financial profile and the bank’s policies regarding the market’s rates. Let us learn how high interest rates affect borrowing and what causes them to rise.
How do high-interest rates affect borrowers?
In India, the RBI levies an interest charge or repo rate on the funds borrowed by commercial banks. An increase in the repo rates affects the interest rates, increasing the overall borrowing cost. Conversely, declining repo rates result in lower equated monthly instalments. If you have chosen a floating interest rate, any changes in the repo rate affect the Loan. You should check whether there is a cap on the maximum increase in these rates and your EMI amount.
On the other hand, if you choose a fixed interest rate, the EMI remains the same throughout the tenure.
Factors affecting Personal Loan rates
Here are factors that affect the Personal Loan interest rates:
Monthly income
Banks check whether you have a stable monthly income before approving your Loan application. Through this information, they assess if you can repay the Loan comfortably. If your income is high, you can support timely repayment and get lower interest rates due to reduced risk.
Credit scores
When you apply for Personal Loans, every bank checks your credit score to assess your repayment capacity. A lower score indicates you are inexperienced or have a poor credit track record. Banks charge higher interest if you apply for a Loan with a low credit score to compensate for the risk. If your score is high, you are a responsible borrower, translating to lower lending risk for the bank and lower rates.
Age
Banks also consider your age to gauge your repayment ability. Younger individuals may not have enough employment history or experience with credit. Additionally, your income flow may be disrupted if you are close to retirement. The risk of default is higher, leading to higher interest rates.
Bank relationship
Banks may charge you lower interest rates if you already have a relationship with them and an account in good standing. You are less likely to default. Based on this positive relationship, you get lower interest rates on your Loan.
Collateral availability
If you apply for Unsecured Loans with collateral, the bank offers a lower interest rate. You can use the EMI calculator for a Personal Loan to compute the permutations and combinations.
Conclusion
Choosing a bank offering competitive interest rates is an ideal way to keep your borrowing costs low. You need not worry about hidden costs or pay foreclosure charges. You can apply for Loans anytime online.
