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What is the Interest Rate on a Personal Loan in India? - All You Need to Know

Updated on: 15 Dec 2021 // 38 min read // Personal Loans
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What is the Interest Rate on a Personal Loan in India? - All You Need to Know

A personal loan helps you meet urgent financial shortfalls. They do not carry an end-use clause and therefore can be put to any use. But they come at a higher rate of interest simply because they are unsecured loans and do not have collateral security backing. Thus, the rate of interest at which a personal loan is borrowed is the most crucial factor of the personal loan process.

What is the Interest Rate on a Personal Loan?

The rate of interest on a personal loan is the interest rate at which the lender approves the personal loan. It is linked to the lending rate set by the Reserve Bank of India. It is the factor that indicates the cost of the loan. The higher the rate of interest on a personal loan, the higher will be the cost of the loan resulting in a high monthly EMI. The average rate of interest on a personal loan in India is generally around 9.5% per annum.

Best Personal Loan Interest Rates in India

Personal loans are given by many banks and non-banking financial companies in India. Every lender promises unique benefits through its products, but what is the interest rate on a personal loan offered by far remains the most attractive feature that acts as the major pull factor for borrowers.

Listed below are some of the best personal loan interest rates in India:

Name of LenderRate of Interest
Top Banks
SBI Bank08.50% p.a. onwards
UCO Bank10.05% p.a. onwards
IDFC First Bank10.49% p.a. onwards
ICICI Bank10.50% p.a. onwards
HDFC Bank10.50% p.a. onwards
Kotak Mahindra Bank10.75% p.a. onwards
Axis Bank12.00% p.a. onwards
Yes Bank13.99% p.a. onwards
Top Non-Banking Financial Companies
Tata Capital10.99% p.a. onwards
Fullerton India11.99% p.a. onwards
India Bulls13.99% p.a. onwards
Bajaj Finance13.00% p.a. onwards
Muthoot Finance14.50% p.a. onwards
App-Based Personal Credit Line
Money TapStarting 1.08% per month
Money ViewStarting 1.33% per month
Early SalaryStarting 2.50% per month
PaySense15.96% p.a. onwards
Home Credit19.00% p.a. onwards

 How to Compare the Personal Loan Interest Rate?

The rate of interest mentioned above is the least that the lending company offers. But the rate of interest at which your application will be approved will depend upon a range of factors like age, work profile, credit score, loan term, etc. therefore, before submitting a personal loan application to any lender, it is important to do an eligibility check or prequalification. 

Once you get your eligibility terms in a soft inquiry, you can compare these for different lenders before you pick the best personal loan deal. The personal loan interest rate is compared on the following basis:

  • Annual Percentage Rate (APR) - The APR is the cost of the loan, including processing fees, expressed in percentage. The higher the APR of the lending company, the higher the cost of the loan.
  • Loan term - As the loan tenure increases, the overall interest outflow increases, making the personal loan expensive. Therefore, the shorter the loan term, the lower the APR will be.
  • Schemes and Discounts - The lending company may offer schemes and discounts to their loyal customers. So, you may be able to lower your loan interest rate by availing of a personal loan from a lender where you have other accounts.
  • Monthly EMI - The monthly EMI amount should fit into your current budget comfortably. A high EMI amount can lead to financial distress. On the other hand, a very low EMI as compared to your repayment capacity will be a result of an unnecessarily long loan term, resulting in a high APR. 
  • Fees and Charges - In addition to the processing fees, a range of other charges are also applicable on a personal loan from time to time. Understand how much is to be paid for late fees, prepayment, or foreclosure. 

 Factors Affecting Personal Loan Interest Rates

Although the lowest interest rate on a personal loan is linked to market lending rates and therefore changes periodically, the rate of interest that is offered to a loan applicant is dependent upon their repayment capacity and credit score. The factors that affect your loan interest rate are:

  • Credit Score - This is the foremost checkpoint for any lending company before advancing a loan. Your credit score indicates your creditworthiness. So, responsible financial behaviour in the past will show a high credit score. On a scale of 300-900, the higher the credit score, the greater are the chances of getting a personal loan approved at the lowest rate of interest offered by the lender. 
  • Monthly Income - A personal loan is without collateral. Therefore, a high monthly income of the applicant would mean a stronger capacity to repay the loan. This lowers the credit risk for the lender. 
  • Employment Status - Salaried employees are usually preferred over self-employed applicants because of their stable job profile and consistent income.
  • Debt-Income Ratio - The portion of the income that goes into repayment of existing loans is taken into consideration while processing a personal loan application. It is calculated through the Debt-Income Ratio and therefore should not be more than 50%.
  • Credit Utilization Ratio - This is typically calculated for credit cards. It is the ratio of credit used to the total credit limit available. A higher credit utilization ratio indicates over-reliance on credit. Lending companies prefer a credit utilization ratio of less than 40%.  
  • Simultaneous Loan Applications - Applying for a loan with multiple lenders over a short period grossly affects your credit score. Each loan approval, rejection, and inquiry reflects in the credit report and lowers the credit score.
  • Relationship with the Lender - Existing relationship with the lender impacts the personal loan interest rate. In case you are a loyal customer and have a good banking history, your existing banker can advance a personal loan at the lowest rate of interest.

How to Get Low-Interest Rates on a Personal Loan?

Searching for the best personal loan deal? Follow these simple steps that can help you enjoy a personal loan at a low rate of interest:

  • Maintain High Credit Score - Lending companies approve personal loans at the lowest rate of interest for applicants who have a high credit score. A credit score of more than 750 will enable you to get a low interest rate on a personal loan.
  • Do Not Miss Repayments - Avoid missing timely repayments of credit card bills or existing EMIs. This adversely affects your credit score and lowers your chances of getting a personal loan at a low rate of interest.
  • Compare Lenders - Before submitting a personal loan application to a particular lender, compare the personal loan interest rates charged by different lenders. A careful comparison will enable you to avail of a personal loan at a low rate of interest.
  • Negotiate With Existing Lender - Existing customers having a good credit history and a healthy relationship with the lending company can negotiate for the lowest interest rate. This will be a win-win situation for both parties.
  • Look Out For Schemes and Special Offers - Lending companies roll out limited period offers to offer a low rate of interest, especially during festive occasions. Also, special schemes for women applicants or salaried individuals can help avail of a personal loan at a low rate of interest. 

 Fixed Vs Floating Personal Loan Interest Rates

A personal loan can be availed at a fixed or floating rate of interest. In the case of a personal loan with a fixed rate of interest, the same rate of interest is charged for the entire loan term. 

Therefore, the EMI value calculated at the start of the loan term remains the same throughout. 

However, in the case of personal loans approved on floating interest rates, the rates change with the change in the MCLR (Marginal Cost of Lending Rate), causing the fluctuation in the corresponding EMI value.

While the personal loan taken on a fixed rate of interest makes you aware of the exact value of EMI, thereby helping in monthly budgeting, it does not allow you to take advantage of the drop in MCLR rates which can help in lowering the interest cost.

How Personal Loans May Affect Your Credit Scores?

A personal loan may have a positive and a negative impact on your credit score. Submitting a personal loan application to multiple lenders at the same time is considered a hard inquiry and will harm the credit score. To avoid this, go in for pre-approvals with several lenders. This will enable you to understand your loan eligibility and other terms and conditions of the personal loan. Submit the personal loan application only once the lender is fixed.

Akin to credit cards, personal loans also help in improving credit scores. Ensure timely repayment of personal loan EMIs with no delays and defaults. This will help boost your credit score and thereby enable you to get future credit at favourable terms and conditions.

How to Calculate Personal Loan Interest Rates and EMI?

Are you looking for how to calculate EMI for a personal loan? Well, you can use the EMI calculator available online. It is available on the official websites of banks and non-banking financial companies. One can also visit third-party aggregator websites to learn how to calculate EMI for a personal loan.

The personal loan EMI is calculated using the mathematical formula -

EMI = [PxRx(1+R)^N]/[(1+R)^N-1]

Here, P is the loan amount, R is the monthly interest rate charged by the lender, and N is the repayment tenure in months.

FAQs

✅How to calculate EMI for a personal loan?

To calculate EMI for a personal loan, 

  • Use an online EMI calculator either through a lender website or a third-party aggregator website. 
  • Enter the values of P (principal amount), R (monthly rate of interest), and N (loan term in months)
  • Submit the details

The personal loan EMI value corresponding to the input values will appear on the screen.

✅Can I compare personal loan interest rates using APR?

APR (Annual Percentage Rate) is the overall cost of the loan. It is a comprehensive total of the rate of interest, and other fees and other charges apply. Therefore, the lower the personal loan APR of the lending company, the lower will be the cost of the loan.

✅ Should I avail myself of personal loans from banks or NBFC?

The rate of interest charged on a personal loan by banks is generally lower than the rate of interest levied by NBFCs (non-banking financial companies). This is because banks impose stringent eligibility checks. This lowers their credit risk. Therefore, if you fulfil all eligibility conditions and have all supporting documents in place, it is prudent to opt for a personal loan from a bank at a lower rate of interest.

✅What is the total interest payout on my loan?

The total interest paid on a personal loan can be checked through the EMI calculator. Provide the values of the principal amount, rate of interest, and loan term. The corresponding EMI value, along with the overall interest component of the personal loan, will appear on the screen.

✅ Is the lowest interest rate the only thing to be considered when taking a personal loan?

The rate of interest charged on a personal loan is of significant importance. It is the direct cost. A higher rate of interest will result in higher loan costs. But in addition to the lowest rate of interest, other charges like processing fee, prepayment fee, foreclosure fee, default penalty, and other associated fees and charges must also be taken into consideration before choosing a personal loan lender.