Borrowing finance comes at a cost. Banks provide finance in various forms, including loans tailored to specific end uses and requirements, such as Home Loans, Loans Against Property, Vehicle Loans, Business Loans for funding growth, and Personal Loans for individual needs.

Premier lenders offer Personal Loans without collateral for repayment within a short term. Banks and NBFCs provide quick finance through Personal Loans to applicants for various purposes, including home renovation, wedding expenses, family holidays, and emergency needs.

The significant charges for a Personal Loan include the Interest payable on the loan amount. Let us examine the terms under which interest is charged and the factors that affect the interest rate charged by Banks and NBFCS.

The current interest rate for a personal loan ranges from 10.99% to 20%. The interest charged for a Personal Loan varies among lenders and is determined based on the cost of funds and each lender’s policies. The customer may be offered different Personal Loan Interest Rates from alternative banks. Let us examine the factors affecting the interest rates charged by banks and NBFCs

Cost of Funds: Banks and NBFCs charge Interest Rates for Personal Loans based on their cost of funds, the Reserve Bank of India issues funds to Banks when in need, against government securities which are repurchased by the Bank as per the Reserve Bank of India repurchase rate or Repo Rate as is commonly known as. A reduced Repo Rate enables Banks to lend at a lower interest rate, and vice versa. Although the fluctuations in the repo rate do not directly affect personal loan lending rates, Banks are asked to review rates and increase lending to infuse cash into the system. With the recent cut in the Repo Rate, home loan rates are being reviewed, although Personal Loan rates have not yet been changed.

The cost of funds also includes the bank’s turnover and profit margins from other services. If banks have increased profits and kept delinquencies under control, a lower interest rate is applied to performing segments.

Policy of the Lender: All lenders, including banks and Non-Banking Financial Companies (NBFCs), establish individual policies for retail lending in the Personal Loan segment. The terms and conditions, as well as the interest rate, are applied following the Bank’s policy. Banks offer discounts on interest rates to:

• Employees of companies categorised as Category A and top-tier firms.
• Customers with salary accounts that sustain healthy balances.
• High-income applicants seeking more significant loan amounts.
• Government employees and corporate account holders.

CIBIL Score, Existing Relationship and Special Offers: A good CIBIL Score of 750+ is the gateway to getting easy credit with the best terms. Individuals who use credit and make timely payments are offered the lowest interest rates for a Personal Loan Top-up on an existing loan or as a Personal loan Balance Transfer from an external Bank.

Customers holding accounts and maintaining a healthy Bank Balance, or those with an existing credit relationship, are encouraged, and further credit is extended to them at discounted rates.

Features of Personal Loan Interest Rates.

While it is essential to know and verify the interest charged on your Personal Loan, noting the features will help you calculate the costs associated with the loan amount.

Interest is Charged at a Monthly Reducing Balance Rate. The interest for a Personal Loan is applied to the monthly reduced principal balance. The EMI (Equated Monthly Installment) charged for repayment of your Personal Loan consists of part principal and interest. Therefore, with every instalment repaid, your principal loan is reduced. The next instalment is charged on the reduced principal amount.

Interest is Applied Annually: The tenure for a Personal Loan is issued yearly therefore, the interest repaid annually is flat. For example;

• A loan of 2 Lakhs was issued for 24 months at a reducing interest rate of 12%.
• The total interest to be paid over 24 months is 13237.09.
• Therefore, the applicant will pay an interest of ₹ 6618.5 annually at a flat rate of 6.62%.

The Interest Rate on a Personal Loan Remains Fixed for the Entire Duration. It is fixed upon approval of the loan amount and the tenure for which the loan is granted. The EMI for the loan amount is deducted through ECS from the salary account as per the mandate signed by the customer. Unlike the interest on a home loan, which is applied at a floating rate and fluctuates with the change in the REPO Rate, the Personal Loan Interest Rate remains unchanged.

Finally, the applicable interest charged is revealed only after the loan is approved. The lender’s credit officer considers the details of the customer listed above to determine the interest to be charged.

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