What Are the Key Factors Considered to Calculate Your Loan Interest Rate? | Hero FinCorp

Economic Indicators Influencing Loan Interest Rates

Here are the indicators that directly affect the loan interest rates.

•  Policy Rates: The RBI repo rate affects lending rates directly. So, any rate hike increases the borrowing costs while any reduction in rates lowers them.
•  Inflation: Increased inflation usually causes interest rates to go up to control the growing prices.
•  Employment Trends: Growth in jobs with stable incomes strengthen borrowers' credit profiles. This helps them in getting favourable loan terms.
• GDP Growth: A strong economy leads to competitive interest rates because of higher lending.
• Consumer Confidence: Increased confidence creates higher demand for borrowing, which can increase rates.

State of the Economy

In a country with a higher economical growth, many industries increase their borrowing capacity to meet various short-term and long-term objectives. Even the citizens increase their spending power in buying new essential gadgets and vehicles. However, when there is a drop-down in the economy, the demand for a online personal loan for buying products decreases. This in turn affects the rate of interest on personal loans.

Government Borrowing

Government expenditure results in Fiscal deficit. This increases the government revenue, influences demand for money, and affects the prevailing interest rate.

Global Trends

Integration of the Indian economy with the global economy shifts the interest rate to support the foreign exchange rate. In order to attract global capital, the interest rates in India also rise and remain in sync with the global trends.

Also Read : Interest Rate: Definition, How It Works, Examples

Personal Factors Affecting Your Loan Interest Rate

Your credit history or credit profile significantly determines the rate you receive on a loan. These are some factors lenders use to determine the rate.

• Income Level: If you earn a fixed and higher income, you can receive better rates.
• Employment Status: If you are an employed professional, you can get more attractive rates.
• Current Debt: If you already have loan payments, you may get a higher rate on a new loan.

Credit Score

Borrower’s credit score is also one influencing factor for interest rates on a personal loan. If you have a good credit score, you have a chance of getting a personal loan at competitive interest rates. A low credit score creates a high-risk situation for the lender to approve the loan.

Loan Tenure

This a common factor influencing an interest rate. The shorter the tenure that is for 6 months or 1 year, the higher will be the interest, and the longer the loan tenure of 10 years or more, the lesser will be the interest rate as regular EMIs will be paid for a long time.

Also Read : What is the Difference Between Fixed and Variable Loan Interest Rate?

How to Calculate Your Interest Using a Simple Formula?

To calculate your interest, you can use this formula: Interest = (Principal × Rate × Time) ÷ 100.

Here, Principal is the amount you borrow, Rate is the yearly interest percentage, and Time is the months/years you’ll take to repay the loan.

For example, if you take Rs 50,000 at 19% per annum interest for 36 months (3 years), the interest will be Rs 28,500. So, you’ll repay a total of Rs 78,500.

You can also use the personal loan EMI calculator to calculate the monthly instalment and total interest payable on your loan.

Conclusion

Understanding the factors that have an impact on Personal Loan interest rates can help you make better borrowing decisions. From credit score and income to economic indicators and loan tenure, each factor plays a role in determining the interest rate you pay. Comparing loan offers, checking your eligibility, and using online tools like the loan EMI calculator can help calculate repayments correctly. Before applying, assess your finances and choose a loan plan that suits your needs and budget for stress-free repayment over time.

Frequently Asked Questions

1. Does the loan tenure affect the interest rate?

Yes, loan tenure affects the interest rate. Longer tenures may reduce EMIs but increase total interest payable over time.

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