There are various factors that decide how much interest rate you pay on your loans. Here we list out five points that determine the interest rate on your loan.
New Delhi: People typically go for a personal loan when they fall short of money to fund their immediate expenses such as a family obligation, medical emergency, vacation or any other thing. While a personal can be availed either from a bank or against your credit card limit, interest rate on them will surely vary. Generally, credit card loans are priced higher than bank personal loans. However, some customers still, avail credit card loans at a cheaper rate than bank personal loans. There are various factors that decide how much interest rate you pay on your loans. Here we list out five points that determine the interest rate on your loan.
Typically borrowers with a high credit score tend to get loan at a cheaper rate than those who have a low credit score. Higher credit score reflect that a borrower is less likely to default on his repayment obligations while a lower credit score indicates, a borrower is likely to default on loan repayment.
2. Loan tenure
Loan interest rate will also depend on loan tenure. The shorter the tenor of the loan, the lower the risk, since the ability of the borrower to repay the loan is less likely to change and hence lower the rate of interest. With the increase in loan tenure, the repayment risk also rises, so banks charge a higher rate on long tenure loans(except for home loans).
3. Repayment track record
If you are a repeat borrower then the interest rate on your loan will depend on your past repayment history. If you have paid all your past EMIs on time then it is highly likely that you will get a lower interest rate on your new loan. But if you have missed any of your past EMIs, then it may lead to banks charging a higher rate on your new loan.
When a loan is secured by collateral, the risk of default by the borrower decreases. So banks charge a lower risk premium, reducing the rate of interest on your loan. But loans without any collateral attract a higher interest rate as the risk of default is high.
Pricing of a loan also depends on competition in the industry. For example, if three/four lenders are charging 13% on a one-year personal loan, then it is likely that your bank will also charge you 13% on a one-year loan.