Interest rates are charged by banks and financial establishments for taking a loan. This money is charged because lenders need to address the risk that the borrower may go bankrupt or otherwise become unable to pay back the loan.
This is a major cost that you have to incur for taking a Personal Loan. The rates seem to fluctuate with different persons as well as with time. So, what are the factors that is governing the interest rate?
Credit Information Bureau (India) Limited Score: Your CIBIL score can determine to a great extent the interest rates that will be charged. Financial establishments conduct extensive checks on an applicant’s repayment history to reduce the risk of non-payment. They do so by checking your CIBIL score. A good credit score will let the lenders award you with a lower interest rate.
Individual Income: The income that you’re earning currently can influence the loan interest rates or even the approval of your application. You have to meet the minimum annual salary requirements for getting approval.
Employer Stability and Name: If you work in a well-established and stable company, the chances are high that the interest rate charged will be low. If you work in a company on the brinks of its downfall, you’re likely to be charged a high rate of interest. This is because you’re seen as someone who will make their repayments, if you work for a stable company.
Government: The government can also influence the interest rates on Personal Loans. Change in monetary policy, which controls economic growth, and the inflows and outflows of money, can change the rates substantially.
When the interest rates on Personal loans are high, you might opt not to take them. This limits the cash outflows. This, in turn, might lead the government to reduce the rates to stimulate national economic growth. Due to the lower rates of interest, you’re more likely to take a loan, and the economic growth rate rises.
Again, to avoid inflation, the government will increase the interest rates. Thus, the cycle continues on.
Inflation: If the rate of inflation is high, the chances are that interest rates charged will go up. This happens as a natural response from the lenders as compensation for the decrease in purchasing power of the money.
Supply and Demand: If there is an increase in the supply of credit, like if you open a bank account, interest rates will be reduced. Whereas, if there is a decrease in the credit supply, like if you defer your loan repayment, the interest rates will go up. So, it’s an interlinked process between your spendings and savings, that affects the economy on a national level.
Time Duration: A long-term loan is more vulnerable to the inflation rate fluctuations. Generally, the longer you take to repay the loan, the higher will be the interest rates charged. They also have a greater chance of not being repaid.
Your Relationship with the Bank: You have a higher chance of landing a lower rate of interest if your relationship with the bank employees is good. If you’re a loyal customer, things will go smooth for you. Banks will not be willing to lose you to other competitor banks.
Commodity Prices: Higher pricing of goods will tend to increase inflation. This, in turn, will increase the rates of interest.
If you’re looking forward to get low interest on Personal Loan that you applied for, you should strive to create and maintain a good relationship with the bank. Though you can not control the Government decisions and inflation rates, you can certainly maintain a good repayment track record.