Interest rate is what the bank or financial institution charges you for lending you funds. In simple terms, it is the charge you pay for borrowing money from the bank.
Interest rates are usually calculated and added to your equated monthly instalments (EMIs) that you pay every month to the bank. In case of personal loans, interest rates are higher compared to that of secured loans such as home and car loans.
The interest rates vary from one bank or financial institution to another and are decided based on the borrower’s credit history and repayment capacity. While some banks offer a fixed rate, others offer floating rates.
If the rate of interest is fixed for the entire tenure of the loan, it is a fixed rate loan. EMIs are constant and the interest is applied on the entire loan amount for the tenure of loan. If the rate is floating, the interest is subject to change. If the rate reduces, your repayment also reduces. Over time, it may be a better option as the interest payable decreases with time and as does the EMI.
Personal Loan Interest Rate Comparison - Top Banks
As discussed above, interest rates are not fixed across banks and financial institutions. Banks offer a range of fixed or floating rates based on the borrower’s income, credit history and repayment capacity. The interest is calculated annually.
Before you decide on which bank to choose for a personal loan, you must compare the interest rates offered by banks. For your convenience, we compare the interest rates offered by some of the top banks and financial institutions in the county.
State Bank of India: The country’s most popular public-funded bank offers floating interest rates for personal loans which means your EMIs will start decreasing with time. The bank decides a rate of interest tailormade for you based on your income and credit history. Currently the bank is offering personal loans with interest rates ranging from 12.75 per cent to 14.75 per cent. Personal loans with the SBI are usually to be paid in five years. You can avail loans for as little as Rs25,000 to as much as Rs15 lakh depending on your need and your credit score. The bank also charges a processing fee of 1 per cent of the loan amount.
HDFC Bank: The bank charges flat interest rate anywhere between 15.50 per cent to 21.50 per cent. With HDFC Bank Personal Loans, you can avail loans up to Rs40 lakh. The bank also offers free Personal Accident Cover with your loan as an insurance. The bank charges a processing fee of up to 2.5 per cent of the loan amount and loans are offered for a tenure of maximum five years. In the last quarter of the year 2018-19, the average interest rate charged by the bank was 12.9 per cent.
Axis Bank: The interest rates charged by Axis Bank on personal loans ranges from 15.75 per cent to 24 per cent. You can borrow amount starting from Rs50,000 and up to Rs15 lakh. The bank does not have a very flexible tenure as the loan has to be repaid latest by 36 months or three years. On the plus side the bank does not charge any foreclosure or prepayment charges so you can close your loan account as you please. There is no processing fee charged by this bank.
ICICI Bank: You can avail loans for specific needs such as a wedding or holiday or even home renovation. He bank charges interest anywhere between 11.25 per cent to 17.99 per cent. You can borrow up to Rs20 lakh as a personal loan from ICICI bank. The bank promises to credit loan funds within 3 seconds into your account after approval of your loan.
Kotak Mahindra: Here, too, you can avail tailormade loans for different personal needs such as a wedding, a vacation, medical expenses or home renovation. Loans upwards of Rs50,000 to a maximum of Rs15 lakh are available. The interest rate charged by the bank ranges from 10.99 to 24 per cent. The bank charges a processing fee of 2.5 per cent of the loan amount.
IDBI Bank: You can borrow between Rs50,000 to Rs10 lakh as personal loan from IDBI bank. This bank also offers free Personal Accident Insurance. IDBI Bank charges a floating rate interest at 12.55 per cent, which means your EMIs will keep reducing with time. You can repay the loan within five years, which is the maximum tenure the bank allows.
Standard Chartered Bank: You can avail higher amount of loans with this bank. The bank offers loans in the range of Rs1 lakh to Rs30 lakh, depending on your income. The loan can be repaid in one to five years. The bank also offers waiver on your last EMI. The rate of interest ranges from 10.99 per cent to 21 per cent. The bank charges a processing fee of up to 3 per cent of the loan amount.
Citibank: The interest rate charged by this bank on its personal loans ranges from 10.99 per cent to 17.99 per cent. A minimum of 0.25 per cent of the loan amount is charged as processing fee. The maximum amount that can be borrowed is Rs30 lakh and the loan can be repaid in tenures ranging from one to five years.
Tata Capital: Personal loans for amounts ranging from Rs75,000 to Rs25 lakh is available at Tata Capital. They charge an interest rate of 11.25 per cent and the loan can be repaid in 12 to 72 months (one to six years).
Edelweiss: Personal loans are available for salaried personnel for up to six times their net monthly salary. The institution lends a maximum of Rs10 Lakh as a personal loan. The interest rate is much higher than other banks and financial institutions as Edelweiss charges 23 per cent per annum.
Factors that affect Personal Loan Interest Rates
There are several criteria that come into play while calculating the interest rate for a borrower. Before you approach a bank for a personal loan, here are the things you must keep in order:
Income: Those with a higher income are less likely to default on a loan and are less risky for the bank to lend. Therefore, they enjoy lower interest rates. Those with lower income have to pay higher interest for taking a loan as they are considered ‘more risky’ by the lender.
Credit Score: It is a number that represents your debt history and your repayment capacity. The higher the credit score, the lower is the interest rate. Make sure you have a credit score of 750 or above when you apply for a loan.
Employment type: If you are a salaried individual, especially in a reputed organisation, you are likely to get a lower interest rate. The interest rates are generally higher for those who are self-employed.
Age: Younger borrowers are offered a lower rate of interest compared to those nearing retirement. This is because the lenders find young individuals with steady income less risky than older individuals who may retire soon. So keep in mind that your age will have an impact on your interest rate.
Relationship with the bank: Interest rates offered to existing customers is often lower than that offered to new customers. So if you have an existing account in a bank or with a lender, you can negotiate for a lower rate of interest.
How to get lowest Interest Rate for Personal Loan
One of the most important things to look out for while applying for a personal loan is your credit score. Find out your credit score. If it is score is less than 600, your loan application will be rejected. Make sure it is at least 750. A higher credit score could help you negotiate with the lender for a lower interest rate.
The second most important thing is to negotiate with your lender. You need not quietly accept the interest offered by the lender, especially if you have a good credit score or are an existing customer. Negotiate your way using these points as leverage and ask for a lower rate.
Make sure your credit score is maintained. Pay your loans and credit card bills on time. Before you decide on the bank, compare the interest rates and offers from various banks. Choose an offer that best suits your needs. You may not necessarily have to go for the lowest rate of interest. You can also choose a loan which offers a longer tenure or zero processing fee or a bank that lets you close a loan account and doesn’t charge closure penalties.
Much like gadgets, there are offers on loans, too, during the festive season. Be on a look out for special offers such as low interest rates, zero processing fees among other goodies. Sometimes banks also offer to waive off the last EMI.
How to calculate interest on Personal loan
EMI or Equated Monthly Instalment is the amount that a borrower has to pay every month to repay the loan taken from the lender. The EMI is calculated with three important facts of a loan—the loan amount, the interest rate charged and the tenure of the loan.
Now, you do not necessarily have to calculate the EMI on your own. Most banks and financial institutions offer a free EMI Calculator tool on their website. You can input the loan amount you wish to take, the interest that might be charged and the duration for which you want to borrow. You can change these variables and find a suitable EMI.
In case you are interested in how EMI is calculated, here is the formula:
EMI = P . r . [(1+r)n/(1+r)n-1],
Where P is the loan amount, r is the interest rate charged per month, and n is the tenure.
FAQs
How can I apply for a personal loan
You can either apply for a personal loan directly through the bank’s website or use a third-party website to compare the loans offered by different banks and apply through the third-party website. If you are an existing customer, you can also apply by logging in to your netbanking facilities. You can also send an email to the bank and apply for a personal loan. The bank’s executives will get in touch with you. You could also walk in to the nearest branch of your bank and ask the relationship manager for help.
What are the documents required while applying for a personal loan?
You will need to submit your income proof which could be in the form of three months’ salary slip, IT returns and bank statements. You will also be required to submit an age proof, identity proof and address proof. This can be in the form of passport, driving licence, Aadhaar Card, Pan Card, voter ID and ration card. You can check the list of documents required at the bank’s website before sending your application. Your application will be sent to the bank. The bank will verify the details and then approve or disapprove your request.
How long does it take for a bank to accept a my loan application?
The time taken by a bank to approve loan applications varies from lender to lender. If you are existing customers, the processing of your application might be faster. The bank takes time to process your application, check your eligibility and verify your documents. Some time is also spent on negotiating the rate of interest. While banks take anywhere between a few days to weeks to approve a loan application. Once your loan application is approved, it takes very little time to disburse the loan. Some banks take as little as three seconds to send the loan amount to your account.
What is my credit score?
It is a three-digit number that represents your credit history and your creditworthiness. Credit score falls in the range of 300 to 900, with 900 being the highest. The credit score is calculated based on how often and how timely you are while paying your loans and credit card bills. If you make all your payments on time, your credit score is likely to improve.
Banks consider credit score as a holy grail before granting loans. So if you have a good credit score, you are more likely to get your loan application accepted. Moreover, you can negotiate for a lower rate of interest. But if you have a poor credit score, the bank may reject your loan application or charge you a higher rate of interest. A credit score of 750 is considered good. If your credit score is less than 600, your loan application will not go through. For credit score between 700 and 750, the bank may charge a higher rate of interest.
What is processing fee?
Processing fee is a nominal fee charged by the lender for processing your loan application. While most banks charge 1-3 per cent of the loan amount as processing fee, other banks have a fixed processing fee. Few banks also offer a waiver on processing fee, especially during festival seasons. Make sure to find out about the processing fee of the bank before applying for a loan.
What are the other charges apart from processing fee?
Apart from the interest rate and the processing fee, banks also charge various other fees and penalties on personal loans. For example:
- Prepayment/ part payment charges: Most banks will not let you close your loan account or pay off a part of your loan before 12 months of the first EMI. Some banks do not allow prepayment or foreclosure throughout the entire tenure of the loan. However, some banks, after the cut-off period of 1 year, allow borrowers to close their loan or pay-off a large chunk. Such payments invite a penalty for paying off borrowed amounts ahead of the loan tenure. These charges are called prepayment or part payment charges. They are usually calculated as a percentage of the outstanding.
- Overdue EMI interest: If you fail to pay your EMI on time, the bank levies a penalty on you. This is calculated as an additional interest on the loan amount.
- Stamp duty: State laws define the stamp duty on loans. They vary from state to state.
- Loan cancellation charges: The fee charged by a bank if you decide to cancel your loan application.
Can I pay my loan in full before the end of the tenure?
This depends on the bank from which you have borrowed. The rules vary. Most banks do not allow foreclosure or premature closure of loans within one year of the first EMI. Thereafter, the bank may charge a penalty for closing your loan account ahead of time. Before you decide to close a personal loan account, weigh the benefits against this penalty. If the fine or prepayment charge is not significant when compared to the reduction in interest in the future, you can decide on whether or not you want to prepay your loan.
Is fixed rate of interest better than a floating rate?
Of the two, which is a better option for you depends on how much risk your are willing to take. The advantage of going with a fixed rate is that you will now exactly what you are supposed to pay every month till the end of your tenure. There’s less risk and you can plan your budget accordingly.
However, floating interest rate is subject to change so there is more risk. The interest rate will change if the Marginal Cost of Lending Rate changes as they are directly linked. Every time the rate fluctuates, your repayment amount will change. While it could mean an increase, when the rate is low, your repayment amount will also decrease.
What is a balance transfer?
When a borrower transfers the outstanding of his or her existing loan to a new lender or bank, it is called a balance transfer. The primary reason this is done is get a reduced rate of interest.
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