Personal Loan Interest Rate: Check these key details before applying for a loan

A personal loan could be a suitable financial product for individuals seeking immediate funds to meet various personal needs. Understanding the intricacies of personal loan interest rates can empower borrowers to make informed decisions.

Let’s delve into how personal loan interest rates work, the factors influencing these rates and how to effectively compare and calculate them.

What is a personal loan?

A personal loan is an unsecured lending offered by banks and NBFCs without the requirement of any collateral. Unlike secured loans that require collateral, personal loans are usually based on the borrower’s creditworthiness and income level. These loans are available for various purposes, such as consolidating debt, financing a big-ticket purchase, vacation or covering medical expenses. The amount borrowed is usually repaid in equated monthly instalments (EMIs) over a predetermined term.

Banks and non-banking financial companies (NBFCs) across India are providing personal loan interest rates starting as low as 10% per annum.

How do personal loan interest rates work?

Financial institutions evaluate the interest rate based on the principal amount borrowed, expressed as a percentage. This rate is also known as the nominal annual percentage rate (APR) and may include additional fees and costs.

The APR provides a detailed picture of the total cost of borrowing. When considering a personal loan, it’s essential to focus on both the interest rate and any associated charges to avoid surprises in the overall repayment amount.

Here are the starting personal loan interest rates (per annum) offered by some popular banks:

Public Sector Banks 

• Bank of Baroda: 12.9%


• Bank of India: 10.85%


• Bank of Maharashtra: 10%


• Central Bank of India: 12%


• Indian Overseas Bank: 10.85%


• Punjab National Bank: 11.40%


• State Bank of India: 11.45%

Private Sector Banks 

• Axis Bank: 11.25%


• Federal Bank: 11.49%


• HDFC Bank: 10.75%


• HSBC Bank: 9.99%


• ICICI Bank: 10.85%


• IDBI Bank: 10.55%


• IDFC First Bank: 10.99%


• IndusInd Bank: 10.49%


• Kotak Mahindra Bank: 10.99%


• Yes Bank: 11.25%

[Source: Bank websites as of Nov 5, 2024. Please refer to the banks' websites for the latest information on interest rates]

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Factors affecting personal loan interest rates

• Employment history and credibility: Lenders often scrutinise your employment history and the credibility of your employer when determining personal loan interest rates. A stable job history with a reputable employer can work in your favour. For instance, government employees may be offered lower interest rates due to perceived job security compared to their private-sector counterparts.


• Comparing interest rates and offers: With many aggregator platforms available, comparing personal loan rates has never been easier. Websites that allow you to assess your eligibility can guide you to the best offers tailored to your needs. Maintaining a healthy relationship with a bank or NBFC could help to get a personal loan at cheaper interest rates. Long-standing customers often have access to customised loan plans and potentially lower interest rates.


• Good credit score and repayment history: Your credit score is one of the most crucial factors influencing the interest rate you may receive. A score of 750 or above significantly enhances your chances of securing a lower interest rate. Maintaining a good credit score involves timely payments of existing loans and credit card bills, as well as limiting new credit inquiries.


• Interest calculation method: Different lenders employ various methods to calculate interest rates, impacting the total cost of borrowing. It's essential to understand whether your loan is fixed or variable. Fixed-rate loans maintain the same interest rate throughout the loan term, providing predictability in monthly payments. Conversely, variable-rate loans may start with lower rates but can fluctuate over time, potentially leading to higher costs in the long run.


• Secured vs. unsecured personal loans: A significant distinction between secured and unsecured personal loans lies in the requirement for collateral. Secured loans, which require an asset like property or a vehicle as collateral, often come with lower interest rates due to reduced lender risk. On the other hand, unsecured loans do not require collateral but necessitate a strong credit score for approval.


• Repayment timeline: The length of the loan repayment schedule can also impact interest rates. Generally, longer repayment periods are associated with higher interest rates due to increased risk for the lender. Opting for a shorter loan term may result in lower interest rates.

How to calculate personal loan rates of interest?

To calculate the total amount payable as an equated monthly instalment (EMI), you can use a personal loan calculator. For example, if you require a personal loan of Rs 1 lakh at an interest rate of 10% for a 12-month term, your estimated EMI would be around Rs 8,793, with total interest paid close to Rs 5,500 over the loan period. Using an online personal loan calculator can simplify this computation.

ALSO READ: How to get a quick personal loan: Your essential guide for instant loan approval

Comparing personal loan interest rates

When assessing personal loan interest rates, it’s important to remember that the rates advertised online may not reflect your actual rate. Lenders often charge processing fees, service charges and GST in addition to the interest rate, known as the nominal APR. Always verify the final rate with your lender before submitting your loan application.

For those seeking a quick and hassle-free solution, digital platforms like Moneycontrol offer access to multiple personal loan options. Through the Moneycontrol app and website you can get access to personal loan offers up to Rs 15 lakh and choose the best offer as per your needs. This 100% digital process eliminates the need for paperwork and has no hidden charges. Interest rates start at 12% per annum.

Conclusion

Overall, navigating the landscape of personal loan interest rates could be daunting for beginners. However, by understanding how the interest rates work and the various factors that influence personal loan approval, you can choose the best offer as per your needs.