The interest rate is an amount paid by customers for borrowing money from financial institutions. It is usually expressed as an annual percentage rate, and the payment can be either fixed or floating.
Individuals willing to dig into the concept of interest rates must know that they are primarily two types of interest rates – fixed and floating – applicable to any financial product. Therefore, it is wise to have a clear idea about the various forms of interest rates and their impact while obtaining credit.
Types Of Interest Rates
As already stated, two types of interest rates significantly impact the overall loan cost. Borrowers can decide whether they want a fixed or floating rate on their chosen financial products during the loan sanction process. However, the applicable interest rates vary with financial products and across lenders.
Therefore, having substantial knowledge and a detailed understanding of the interest rate and how it functions in all of its types will allow borrowers to avail a lucrative deal when applying for credit.
Here’s is the breakdown of the types of interest rates –
- Fixed interest rate
As the name suggests, fixed interest rates remain similar throughout the repayment tenor and are tied to a line of credit that is repaid along with the principal sum without fail. This particular type of interest rate is the most common form for borrowers as it is convenient to evaluate and understand for both the borrower and lender. This is because they know the exact amount of interest obligation tied to the credit line.
- Floating interest rate
This form of interest rate varies depending on the market volatility (change in repo rate) and the yield curve. The latter is used as a standard parameter for multiple debts in the market, such as lending rates of financial institutions, mortgage rates, etc. In addition, it is used to anticipate changes in the economy’s growth.
Usually, fixed interest rates are higher than floating ones as the former assures lenders that the borrowers will repay the EMIs throughout the repayment tenor.
However, borrowers can benefit if the credit is under variable rates and the prime interest rate drops in the market. If borrowers contemplate no change in the market conditions in the near future, one can consider a floating interest rate.
Apart from these rates, borrowers must also learn about mixed rates applicable for both fixed and floating types during a particular period of loans. Such credits apply fixed rates during the initial loan period, while variable rates are applied during the later stage of the loan tenor.
Borrowers often get baffled between floating and fixed interest rates when availing of a personal loan. However, since the selection of interest rates impacts the two most crucial financial aspects, EMI and repayment, borrowers must carefully choose the suitable option.
Factors Affecting Personal Loan Interest Rates
Since the payable interest determines the overall borrowing cost, individuals must learn to keep it reasonable. Here are some of the factors that will help borrowers to avail of affordable interest rates against their chosen financial product:
- Credit score
Since personal loans are unsecured advances, borrowers strictly check the CIBIL score of an applicant before approving a loan amount. A score above 750 is considered healthy, and borrowers must maintain this figure to obtain affordable interest rates and flexible loan terms. In this regard, borrowers must know the things they can do to improve their personal credit scores.
- Eligibility parameters
Since personal loans outstanding balance accounted for a y-o-y growth of 15.3% till 2020, lenders have revised the qualifying parameters to reduce the delinquency rate in this sector. The eligibility parameters vary across lenders, and meeting them is necessary to avail better interest rates on personal loans
Apart from meeting loan eligibility, individuals must produce necessary documents to avoid complications during loan approval.
- Type of interest rate
One of the factors affecting the personal loan interest rate is its category. Usually, a personal loan is available for both fixed and floating rates. Since borrowers already know how these rates function, they need to carefully choose the rate suiting their financial requirements and constraints. However, one can use an interest calculator to evaluate the monthly installments in both cases.
One must remember these fundamental factors before applying for a personal loan.
Besides, leading financial institutions like Bajaj Finserv to extend exclusive pre-approved loan offers on a comprehensive range of secured and unsecured financial products. These offers significantly reduce the hassle of documentation and accelerate the loaning process. Existing customers can check their pre-approved offers by mentioning their names and contact information.
To sum it up, borrowers must choose a suitable interest rate based on their financial capacity to avoid any burden in the long run.
Read More: Choose the better option between flat interest rate or reducing balance rate
