The interest rate applied on any form of credit plays a significant role in deciding the EMI amounts. The same is the case with Personal Loans. Interest is the portion of the money that you will have to pay for a particular credit line on top of the principal amount. Your interest rate depends on several criteria, such as monthly income, credit score, age, etc. You must know the relation between interest rates and the monthly instalments if you want to calculate EMI for a Personal Loan.
How do interest rates impact the monthly instalments on a Personal Loan?
Even the slightest change in the interest rate can significantly affect EMIs. Here is an example to clarify that further.
Let’s say you apply for a Rs 1 lakh Personal Loan with a 6.5% interest rate for 3 years. The monthly payment, in this case, will be Rs 3065. But if the Personal Loan’s interest rate were set at 10%, the monthly payment would rise to Rs 3227, or Rs 162 more each month. Even while it might not seem like much, it can add up over time. With a 10% rate of interest, the total interest paid for a 3-year loan would be Rs 27,482 compared to Rs 10,336 against 6.5%.
What are the factors that impact interest rates?
The interest rate that any financial institution charges depend on several factors, such as:
· Credit score: As Personal Loans are unsecured credit facilities, lenders will check the credit score of the applicant before sanctioning a loan. Those with poor credit scores will be subject to higher interest rates due to the high risk of default.
· Borrower’s income: Lenders consider the applicant’s income when deciding the interest on the Personal Loan. Therefore, applicants with a higher annual income are likely to receive a lower interest rate as they possess a lower default risk to lenders. Those with lesser yearly income, however, might be charged higher interest rates.
· Employer details: Applicants working in a reputed organisation or any MNC are more likely to get lower interest rates on a Personal Loan. For self-employed individuals, applicants with a profitable business are also eligible for this facility.
· Employment type: Financial institutions charge different interest rates for self-employed and salaried applicants.
· Lender and borrower relationship: While opting for a Personal Loan in Pune or anywhere else, the current customers of a financial institution will receive preferential interest rates as long as they have a strong working relationship with the lender.
Wrapping up
To sum it up, this is how interest rates affect EMIs on a Personal Loan. If you are planning to opt for this credit option, you must find out the monthly instalment figure before submitting an application. In this regard, you can use the Personal Loan EMI calculator and determine the EMIs. The calculator works on three variables (principal, interest rate and loan tenure) and displays the results based on your values. This will allow you to plan your monthly budget and enjoy a smooth and hassle-free borrowing experience.
