What Factors are considered to calculate the Interest Rate?An interest rate is one factor that makes people think twice about whether to take a loan or not. This is because a personal loan amount when due for repayment becomes heavier with the interest rate added to it. However, interest on a loan is unavoidable and every borrower applying for a personal loan will have to bear the interest in EMIs. It is a commission that lenders levy in exchange for offering the desired loan amount during a fixed tenure. Interest on a loan is risk-bearing compensation for the lender.
The lender usually charges a high-interest rate on personal loans to ensure their money is safe against potential risks. Different financial firms and NBFCs in India charge a different percentage of interest on personal loans. So, it is a wise thing to compare the interest rate on financial websites and go for the best one to afford EMIs. Also, borrowers can make use of the EMI calculator to get clarity on the percentage of interest and tenure applied to the personal loan amount. Accordingly, decide a suitable EMI that is easy to repay monthly.
Whether you are applying for a personal loan for the first time or have multiple personal loans running, it is advisable to consider the factors to calculate the interest rate:
State of the EconomyIn a country with a higher economical growth, many industries increase their borrowing capacity to meet various short-term and long-term objectives. Even the citizens increase their spending power in buying new essential gadgets and vehicles. However, when there is a drop-down in the economy, the demand for a personal loan for buying products decreases. This in turn affects the rate of interest on personal loans.
Government BorrowingGovernment expenditure results in Fiscal deficit. This increases the government revenue, influences demand for money, and affects the prevailing interest rate.
Global TrendsIntegration of the Indian economy with the global economy shifts the interest rate to support the foreign exchange rate. In order to attract global capital, the interest rates in India also rise and remain in sync with the global trends.
Credit ScoreBorrower’s credit score is also one influencing factor for interest rates on a personal loan. If you have a good credit score, you have a chance of getting a personal loan at competitive interest rates. A low credit score creates a high-risk situation for the lender to approve the loan.
Loan TenureThis a common factor influencing an interest rate. The shorter the tenure that is for 6 months or 1 year, the higher will be the interest, and the longer the loan tenure of 10 years or more, the lesser will be the interest rate as regular EMIs will be paid for a long time.
Use the interest rate calculator to easily calculate the interest in no time or go the manual way using the below simple interest formula:
Principal Loan Amount X Interest Rate X Total Number of Years = Interest
INR 2,00,000 x 5% x 5 = 50,000 is the interest for 5 years