How Interest Rates Are Structured for Personal Loan

Whether it is a holiday that you always wanted to go on for a long time or a wedding that seems to cost a bit more than your planned budget allocation, one of the simplest and least troublesome avenues for making it happen is by opting for personal loans. There are many reasons for this going for this option which range from sheer convenience of the application process to speedy approval and disbursement.

Why a Personal Loan-

In addition to that, in the recent years, there have been a myriad of lenders who have brought a sense of freshness to the whole market. Not only are there various rates of interest but also loans that are shaped in such a way that it seems lucrative to go for these personal loans. As a matter of fact, in addition to the normal avenues like banks and NBFCs, there is a new avenue that can be availed by borrowers, namely, the P2P or peer-to-peer platform that promises to offer a good deal to both the borrower as well as the lender.

About Personal Loans-

Now that we have steeped ourselves in this domain, we should also know that when we opt for a loan, we are obligated to pay a certain charge to the lending institution; whether it is a bank, a NBFC or a P2P platform. Each of these institutions charge a certain rate of interest when you apply for personal loans. Of course, there is a difference between various sections of the lender institutions. The conventional government affiliated banks offer loans at a lesser rate of interest, which seems attractive but then there is a lot of tedious paper work involved. On the other hand, a private bank operates with smoother processes where lesser paperwork is involved but they charge more interest than the government backed banks. The newest entrants are the players in the P2P sector. This is a sector that promises to give a better deal to both the lender as well as the borrower.

About Rate of Interests-

One of the main aspects of the loan market is the rate of interest. There are broadly two types of interests that are charged to the borrowers. One is the fixed rate of interest, the other is the concept of Reducing Balance, which is also known as Effective Interest Rate or the EIR and the last one is the floating rate of interest. In the first one, the interest rate is fixed for the entire duration of the loan, in the second one, the interest is adjusted for compounding over a given period and in the third, the interest rate is dependent on market volatility. Often, the borrower pays the personal loan back at a higher cost than if he had opted for a flat rate of interest. However, it seems more enticing since the principal doesn’t remain the same.

Considering all these aspects of loans, it is obvious that not only is there more than what meets the eye when it comes to personal loans but also that we have to be knowledgeable and astute enough to opt for the right loan structure, which would ensure it would be advantageous over the entire period of the loan.

“Finserv Markets, from the house of Bajaj Finserv is an exclusive online supermarket for all your personal and financial needs. Loans, Insurance, Investment and an exclusive EMI store, all under one roof – anytime, anywhere!”