Being categorized under the unsecured loan, the personal loans offered by the banks and other non-banking institutions like peer-to-peer lending solutions online come with a higher rate of interest than the vehicle loans, auto loans, and home loans. In general, the personal loan interest rate may range from 13% to 24% p.a. However, the PL against collateral security may come with a lower interest rate.
Every bank charges a diverse interest rate. As the interest rate is heavy, many banks advertise with their monthly interest rate instead of the annual interest rate, to appeal the borrowers. However, depending upon the borrowing and repayment capacity of the borrowers, the banks may adjust the interest rate. The common criteria for evaluating the trustworthiness of the customers include their age, current income status, profession, credit history, locality, the company they work for, etc.
The employees with stable income from a reputed organization may get the personal loan with a lower interest. On the other hand, people who have been paying excessive EMI and working for a smaller company, without a stable income cannot dream for a lower interest. Similarly, the banks consider the credit history, asset/property, longevity of the business, etc., for the self-employed applicants. Akin the banks, the p2p lenders check the affordability of the borrower, to fix the interest rate.
How are personal loan interest rates calculated?
In general, the lenders use the reducing balance method to calculate the personal loan interest. According to the rules and practices of the financial institution, it may be either daily or monthly or annual reducing method.
To make it clear, let us take the monthly calculation for a complete explanation. The lender charges interest on the outstanding unpaid amount, at the beginning of a month. For example, the personal loan of Rs 5 lakhs at the interest of 14.5% p.a. taken for 10 years, from the month of January has the outstanding balance of Rs. 5 lakhs at the end of January.
Therefore, the 14.5% interest calculated on Rs. 5 lakhs is Rs. 6,042, making the outstanding balance as Rs. 5,06,042, on February first. Eventually, the first EMI costs Rs. 6,115, as 14.5% p.a is calculated on Rs. 5,06,042. A longer tenure may have lower EMI, but the interest rate may be heavy. However, the bankers do not limit their calculation with this formula.
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To make it easier, all the banks and peer-to-peer lending websites have installed loan calculator for instant EMI estimation. The leading p2p lender in England and India, has a personal loan interest rate calculator, which estimates the monthly repayment amount, the interest repayment amount and the total repayment amount, in a single click. In today’s trend people prefer P2P lending, as they can choose the lenders and if your credit rate is in a good shape, you can make it a tool to negotiate with the lenders in the P2P marketplace.
Since everything goes online, starting from the search, application, document submission, approval to disbursal of the loan amount, with the customized interest rate, the borrowers are attracted towards the peer-to-peer lending concept.