How is Personal Loan Interest Rate Calculated in India?

In today’s fast evolving world, financial needs can emerge at any time. Whether it's for a medical emergency, a wedding, home renovation, or even a dream travelling for a long vacation, personal loans have become a useful solution for many Indians. If you are looking for a personal loan then one of the most important factors you need to consider for taking a personal loan is the personal loan interest rate. Understanding how interest has been calculated can help you make better decisions and save money in the long run. In this blog, we are going to understand how personal loan interest rates are calculated in India, and how you can find the best low interest rate personal loans.

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Factors Affecting Personal Loan Interest Rate

There are several factors that determine the personal loan interest rate in India. Here some of the factors that lenders may consider: 

1. Credit Score : Your credit score is one of the main factors that lenders consider. A high credit score (750 or above) indicates that you are the most responsible borrower and you repay your EMIs on time. On the other hand, a low credit score results in higher interest rates.

2. Income Level : Usually lenders prefer borrowers with a stable income and if you are salaried person then you should have a stable employment history. If you have a constant job and a good income, you are more likely to get a lower interest rate.

3. Loan amount and tenure : The loan amount and tenure are also the two factors that affect the interest rate. Generally, shorter tenures have lower interest rates in comparison to longer tenure.

4. Market Conditions : The Reserve Bank of India (RBI) sets the repo rate which directly influences the interest rates offered by the banks and NBFCs. If the repo rate is low, lenders may offer lower interest rates and if the repo rate is high, they will offer high rates.

Understanding Effective Interest Rate

When you apply for a low interest rate loan, lenders and banks may advertise rates like “starting from 10.99%”. However, the effective interest rate might be higher due to:

1. Processing fees (usually 1-3% of loan amount)

2. Documentation charges

3. Insurance premiums

4. Late payment penalties

5. Pre-payment charges

How Personal Loan Interest Rate is Calculated?

Banks and NBFCs use other methods to calculate interest rates on personal loans. The two most common types of calculation are:

How to Compare Personal Loan Rates?

There are so many lenders out there offering personal loans, it's important to compare personal loan rates before making a financial decision. Here is how you can do it:

1. Use online comparison tools : BigMudra offers a comprehensive loan calculator which is easy to use. Simply enter the loan amount, tenure and other information, and you will get the results.

2. Check the APR : While comparing loans, check out the Annual Percentage Rate( APR) instead of just the interest rate. The APR includes the interest rate as well as other fees and charges, giving you a better idea of the total cost of the loan.

3. Read The Fine Print : Some of the lenders may offer best low interest rate personal loans but charge high processing fees or prepayment penalties. So, make sure you read the terms and conditions carefully before applying for a loan.

4. Negotiate with lenders : If you have a good credit score and a strong credit profile, you can try negotiating with lenders for a lower interest rate.

Digital Revolution in Personal Loans

In the era of the digital world, there is a rise in instant personal loan platforms such as BigMudra that have made borrowing more easy and simple. BigMudra offer:

1. Quick approval processes

2. Minimal documentation

3. Competitive personal loan interest rates

4. Digital KYC

5. Instant disbursement

However, be cautious of predatory lending apps offering instant loans at very high interest rates.

How to Apply for a Low Interest Loan?

If you are looking to apply for a low interest rate personal loan, here are some tips to help you get the best deal:

1. Improve your credit score : Pay your EMIs and bills on time, reduce your credit card balances if you have one, and avoid applying for multiple loans or credit cards in a short period of time. This will help you increase your credit score.

2. Choose the right lender : Different lenders offer different interest rates. Banks, NBFCs, and online lenders all have their own eligibility criteria for determining interest rates. Research and choose a lender that offers the best interest rates for your profile.

3. Opt for a Shorter Tenure : When you apply for a personal loan try to opt for a shorter loan tenure, it will help you lower the interest rate. Longer tenure may seem attractive but it usually comes with higher interest rates.

4. Consider Pre-approved offers : If you have a good relationship with your bank, you may receive some pre-approved offers for personal loan with lower interest rates.

5. Apply online : Many lenders such as BigMudra offer lower interest rates for instant personal loan while applying online. Online applications are faster, and have no paperwork.

Making an Informed Decision

Before applying for a personal loan:

1. Use online EMI calculators to understand your repayment schedule

2. Read all terms and conditions carefully

3. Check for hidden charges

4. Ensure you can comfortably manage the EMIs

5. Compare offers from multiple lenders

Conclusion

Understanding personal loan interest rate calculations helps you make better borrowing decisions. While instant personal loans offer convenience, taking time to compare personal loan rates and understand the terms can save you significant money in the long run.