Before applying for credit, ask, ‘Are interest rates 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.
The Personal Loan interest rates offered depend on several factors, such as your financial profile and the bank’s policies regarding the market’s rates. Read on to learn how high-interest rates affect your 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, a decline in the repo rates can result in lower Loan EMIs. If you have chosen a floating interest rate, any changes in the repo rate affect your 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 can affect the interest rates on your borrowing:
- 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 applying for an Instant Personal Loan, every bank checks your credit score to assess your repayment capacity. A lower score indicates that you are either 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, it means 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.
- Banking relationship: Banks may charge you lower Personal Loan 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 a lower interest rate on your Loan.
- Collateral availability: If you apply for unsecured Loans with collateral, the bank will offer you a lower interest rate.
Conclusion
Choosing a bank offering competitive interest rates is a great way to keep your overall borrowing cost low. You need not worry about hidden costs or pay foreclosure charges. You can apply for Loans anytime online.