Types Of Personal Loan Interest Rates

Every bank has a different method of functioning. There are different types of offers and benefits that they offer. They want to keep their customers happy. Hence, they choose to provide user-friendly services.

Interest rate is the rate at which interest is applicable on any amount borrowed from a bank or Non-Banking Financial Company (NBFC). Personal loan interest rates are the critical factors that determine the selection of a loan application. Thus, always compare interest rates from multiple lenders before settling on a loan offer.

There are two types of Interest rates applicable on a personal loan, these are:

• Fixed-Rate of Interest
• Floating Rate of Interest

1. a) Fixed interest rate: In this case, the rate of interest remains constant throughout the loan tenure. Consequently, the monthly EMI amount also remains fixed throughout the loan repayment period. It may help to plan long term monthly expenses.
   
2. b) Floating interest rate: It depends on either the limitation set by the lender or as current market conditions. As a result, the floating interest rate is liable to change periodically, which leads to an increase/decrease in loan tenure or monthly EMI pay-outs depending on whether the rates move upwards or downwards.

Interest Calculation Methods
A personal loan calculator, available on online banking apps, can be used to calculate interest in the following methods:

• Flat Rate method: The interest gets calculated on the total loan amount initially borrowed over the entire tenure of the loan.
  
• Reducing Balance method: As monthly EMIs are paid off, parts of the loan amount and the interest component are also reduced. Thus, the principal loan amount decreases. The interest is calculated on this decreasing loan amount and not the total amount initially borrowed.

Interest Rates for Different Applicants
Most lenders consider some factors when deciding the interest rate applicable to loan borrowers. The following are some points on personal loan interest rates differ depending upon the applicant type:

• Salaried and self-employed: Generally, salaried employees with a stable employment record employed with reputed organizations get the loan at a lower interest rate than independent professionals because they have greater job security and better repayment capacity towards the loan. Self-employed applicants who have stable sources of income can also take these loans from banks.

• Women: Certain banks and NBFCs provide a preferential rate of interest to women. It is to promote salaried women, entrepreneurs, and professionals to fulfil their dreams and be financially stable.

• Pensioners: Pensioners can get special personal loans at a relatively lower rate of interest from banks. Beyond the applicant type, the interest rate depends on the profile of the loan applicant. People with a stable income, decent credit history tend to receive a loan at a lower rate, irrespective of their category.