Are Personal Loan Rates Going Up? Know everything about its impact

Updated on: 5 Apr 2024

Before you plan on getting credit, you must ask the question, ‘Are personal loan rates going up or down?’. This is because interest rates significantly affect your overall borrowing cost. With an increase in the rates, your repayment amount will also go up and vice versa.

These interest rates depend on several factors, from your financial profile and the policies of the lending institution to the market rates. Read on to learn how high rates affect your borrowing and what causes an increase in rates.

How High Interest Rates Affect Borrowers?

In India, the Reserve Bank of India (RBI) levies an interest charge, known as the repo rate, on the funds that commercial banks borrow.
With an increase in the repo rates, interest rates levied by the lenders also rise, increasing the borrowing cost of your loan.
Conversely, a decrease in the repo rates can result in your loan EMI also going down.
If you have chosen a floating rate, any change in the repo rate will affect your rate too.
On the other hand, if you have chosen a fixed rate, the EMI will remain the same throughout the tenure.
If you choose floating interest rates, you must check if there’s a cap on the maximum increase in these rates and your EMI amount.

Also Read: Why Personal Loan Interest Rate is High?

Factors that Lead to an Increase in Personal Loan Interest Rates

Here are some of the factors that could increase the interest rates offered to you:

Monthly Income

Lenders check whether you have a stable monthly income or not before approving your application
With this information, they assess if you’ll be able to repay the loan comfortably
In addition to deciding whether to approve your application, they consider your income to decide the interest rate as well
If they believe that repaying the loan with your income may be difficult, they may charge a higher interest rate to compensate for their risk
On the other hand, if your income is on the higher end and can support timely repayment, they may offer lower rates due to the reduced risk

Nature of Employment

In addition to your monthly income, lenders also consider your employment status
For this, they evaluate:

Whether you are a salaried employee or a self-employed individual
Your work experience (employment history) in your current organisation
The reputation of the organisation you’re currently working in
The age of the business you’re currently operating
Whether your business has stable or seasonal income

With this information, lenders decide if your employment is stable enough to support your loan repayment
If it is, they may offer you loans at lower rates since the risk of default is low and vice versa.

Credit Score

When you apply, the lending institution checks this score to assess your repayment capacity
A lower credit score indicates that you are either inexperienced or have had a poor track record when it comes to credit
Lenders may charge a higher rate if you apply with a lower score to compensate for their risk
If it is on the higher side, it shows that you have a stable financial profile and are a responsible borrower
This leads to a reduction in the risk for the lender and they may offer loans at lower rates

Age

Lenders take this factor into account to gauge your repayment ability
For younger individuals who have just entered the job market, lenders may assume that you don’t have enough employment history and don’t have experience with credit
In addition to that, if you’re close to retirement, your income flow may be disrupted
In these cases, the risk of default can be higher, leading to lenders offering a higher rate.

Relationship with the Bank

Lenders may charge a lower interest rate if you’re an existing or a past customer with an account in good standing
In case you are, they may view you as a trustworthy borrower, who is less likely to default
Based on this positive relationship, they may offer you a lower rate and vice-versa

Availability of Collateral

If you opt for unsecured loans, the lender may charge a higher rate for the increased risk
If you’re pledging collateral, lenders may offer you a comparatively lower rate
The asset you pledge as security strengthens your application and lowers the lender’s risk
If you fail to pay your loan on time, the lender can legally recover the amount through your collateral
Some assets you can offer as collateral include:

Gold
Real estate
Investments
Vehicles
Inventory
Accounts receivable

Existing Liabilities

Your existing financial liabilities also influence the interest rates. These liabilities include:
- Loans
- Credit cards
- Monthly payments
If you have a lot of expenses, lenders may assume that repayment may be challenging and you may default in the future
To compensate for this risk, they apply a higher interest rate on your loan

Choosing a personal loan lender that offers competitive rates is a great way to keep your borrowing cost low. Fibe offers Instant cash Loans of up to ₹5 lakhs at rates starting at 2% per month with tenure options of up to 36 months. You also don’t have to worry about hidden costs or pay any foreclosure charges that can drive up your borrowing cost. Download our Personal Loan App or apply directly through our website with minimal requirements.

FAQs on What Rising Personal Loan Rates Mean For Borrowers

Are interest rates for loans going up?

The answer to the question, ‘Will personal loan interest rates rise?’ depends on various factors, such as:

Changes in the repo rates
Your financial profile
Rules and policies of the lending institution

What happens to borrowers when interest rates rise?

In such a scenario, the interest you pay on the loan will also increase. This can result in increased overall borrowing costs. However, the change in rates will affect your borrowing if you have floating rates and not if you have fixed rates.