What is considered a good personal loan interest rate?

Getting a personal loan has become increasingly simpler these days. Gone are the days of long winded loan searches and thick files of paperwork. In the digital age, things have improved considerably in terms of simplicity, speed and accuracy as well.  Thanks to the widespread adoption of fast mobile internet, lending can be now processed and executed through a loan app. This allows considerable advantages in all terms including the personal loan interest rate.

Also, earlier the interest rates for personal loans were very high, but today with the increase in demand and market competition, the interest rates have come down considerably. Today, you can avail a personal loan at a very affordable interest rate through a personal loan app.

Understanding the concept of interest

When you are taking a loan, you are basically renting someone else’s money to fulfil your financial need in return you are promising to pay a certain amount known as the interest on the loan. The interest is the profit that the lender makes for taking the risk of lending you the money. It also helps them get the value of their money against the inflation.

Why do lenders need to take interest?

The lender charges you an interest on the principal amount that they lend to you. This interest helps them in generating revenue, beating inflation, operating their business and making a profit.

The interest you pay on a loan is used by lenders in multiple ways:

1. To cover employee salaries: First and foremost, the money you pay as interest is used by the lenders to pay off the salaries of their employees. Like any other business, the personal loan app is also powered by its employees. In the case of conventional lenders, the number of employees is much higher and that is why they charge higher interest rates as well.
2. To cover the cost of capital: Lenders need the money out of thin air to lend it and they need to get that money from somewhere. Generally, this money comes from capital markets from where the lenders will borrow capital in bulk and then use it for retail lending to the regular people through the loan app. The interest that you pay on loan is also used by the lender to pay off their own interest dues in the capital markets.
3. To cover the cost of doing business: Every lender has to maintain offices and business presence as well as undertake regular activities like documentation and application processing as part of their business. All of this costs a lot of money and while the lenders do charge a nominal loan processing fee, it cannot cover all the costs. Most of the cost of doing business by the lender is actually covered from the interest you pay.
4. To cover their own tax bill: Every business in India is expected to pay their fair share towards the common good in the form of taxes and these can be in various forms for businesses including GST and income tax. The interest you pay on loan is also used by the lenders to cover their taxes.
5. To actually generate profit from business: A business will not last for very long if it does not show any growth and does not generate any profit for the owners and shareholders. Part of the interest you pay on your loan is used by the lenders as their own profit from which they also invest to further improving the whole business to make it future ready.

The impact of interest on your loan

Understandably the interest has a direct relation with the loan amount you borrow. Since interest is charged as a percentage of the original amount borrowed within a specified period of the loan, the higher your interest rate, the higher interest rate you will have to pay.

Here are a few things about interest rate that you must know –

• Higher interest rate means higher EMI per month.
• Higher interest rate means longer loan duration.
• Higher interest rate means lower loan eligibility.

As a result, a good interest rate is something which allows you to get the best possible deal on how much you can borrow, how much you pay every month and for how long you actually have to keep on paying the loan back before it is cleared.

How to get a good personal loan interest rate?

Here are a few tips that can help you get a personal loan at a good interest rate –

• The most effective way to ensure that you are getting a good interest rate is to maintain an excellent credit score. Most lenders checks for a goof credit score to offer the best deals including lowest interest rates.
• Next you need to be on the lookout for special offers and festive schemes by lenders because this when they want to do most of their business and thus come up with the best offers on both interest rates and loan processing fees.
• To get a good interest rate, you can try availing the loan from a personal loan app. These apps do not have the high cost of doing business like most conventional lenders and they pass on this benefit to the borrowers in the form of attractive interest rates.

Conclusion

There is no universally applicable ‘good’ interest rate, but an interest rate that suits your affordability and brings you the needed features is good for you. The interest rate differs from borrower to borrower, and from lender to lender, you need to find out what the ‘good’ interest rate for you.