The interest rate is often the most critical factor when choosing a personal loan. An interest rate is the amount of money a lender charges as a percentage of the loan amount. Since it is a crucial factor, the personal loan interest rate becomes the primary factor to thoroughly check when applying for a personal loan. Below are a few factors you should consider about interest rates when applying for a personal loan.

  • Your Credit Score and history

The most important factor that affects you is your credit score. A credit score is a number that indicates how likely you will pay a loan back on time. It is based on the information in your credit report, which is a credit history record. A higher credit score of 750 or above shows that you have a better credit history and that you are less of a risk to lenders. Hence, you could get a loan at a lower interest rate if you have a higher credit score. 

Similarly, if your credit score is lower, you may be offered a higher interest rate.  When applying for a personal loan, you should compare your credit score, and the interest rate offered to you. For instance, if you have a healthy credit score and yet you are offered a higher interest rate, you could talk to your financial institution’s relationship manager and see if they can offer you a lower interest rate. 

  • Diminishing interest vs flat rate

Diminishing interest is a type of interest calculation where the interest is added to the remaining balance of a loan. This means that the interest you pay each month will go down as you pay the principal balance of the loan.  

For example, if you have a loan of Rs. 1,00,000 with a 10% diminishing interest rate, and you pay Rs. 10,000 towards your capital in the first month, you will pay interest for Rs. 90,000 for the next month because the principal balance will have gone down.  

On the other hand, a flat interest rate is a type of interest calculation where the interest rate stays the same throughout the loan term. This means that the interest you pay each month will be the same, no matter how much of the principal balance you have paid off.  

For example, if you have a loan of Rs. 1,00,000 with a 10% flat interest rate, you will pay the same interest each month until the loan is paid in full. 

In general, the diminishing interest rate is considered to be more beneficial. Hence, if you are offered a flat interest rate, you could talk to your lender and see if they can offer you a plan with a diminishing rate.

  • Charges above and over personal loan interest rate

Aside from interest rates, a variety of extra charges could be involved with a personal loan. The processing charge is one of the most important costs to consider. Banks may charge up to 2% of the loan amount as a processing fee.  

Other expenditures to be aware of include late payment penalties, foreclosure penalties, and part-payment penalties. Hence, reviewing the loan's numerous terms and conditions is a good idea before signing.

Additional Read: Prudent measures to reduce your existing personal loan EMI and interest rate

Ending note

The personal loan interest rate is an important factor to consider when applying for a loan. Your credit score and history, as well as the type of interest rate offered, can impact the interest rate you are offered. It is also important to be aware of any additional charges associated with the loan, such as processing and penalty fees. By considering these factors, you can find the best personal loan option for your financial needs and goals.

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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.