Understanding Interest rates on a personal loan

Taking personal loan is becoming a norm today for most of the middle class families today. The reason for taking out a loan can depend greatly on the circumstances of an individual. In the amidst of high expenses faced by the average middle class with lower salary strata, there is little one can do to avoid plethora of personal loans. Be it for the advancement of children’s education, buying luxurious stuff, renovating or repairing home, or buying a car, you need to borrow a considerable amount of money to meet all those expenses. It is thus of utmost importance to understand repayment options and to calculate interest rates on the personal loans. Calculating the interest rates initially will greatly help you in managing your loan in the end.

For the people who are salaried or self-employed can show a proof of constant flow of income which suggest a high chance of repayment within a specific time frame and apply for a loan. His income sheet can be a great proof for the bank of his potential to repay the amount. The credibility of the company where one is working, credit history of a person applying for a loan amount and the past-relationship of a person with the bank are few considerations for getting a loan amount. Based on all of this information, a person can apply for a loan with lower interest rate and this can also help him in waiving off the processing fee etc.  The best part of the loan is that it can be taken without any need of security or collateral. It follows a very simple process of application and document submission. Hence taking out a loan without following a troublesome procedure can ease your stress and application process.

The interest rates can vary according to different banks. The range of interest rates on the loans can fall between 12% and 15%. There are different method of calculating interest rates on the loans. Deciding upon, what bank has to offer, mode of calculation suitable for a person applying for a loan, credibility of an individual are the factors on which interest rates are calculated.

The different ways of calculating interest rates on personal loan are:

Flat rates:Gettinga loan on a flat interest rate means that you have to pay much more that you would otherwise would. As in a flat interest rate calculation, the interest in calculated on the principal initial amount throughout the tenure of the loan, the outstanding loan amount can’t be reduced. Thus one end up paying much more than one would through different kinds of interest rates used for calculation.

Reducing balance interest:  Reducing balance interest is advisable option in most of the cases as it works cheaper than the flat rates. In this way, the interest on the loan amount keeps on reducing as it gets calculated on a regular reduced principal amount.

Floating rate:The floating rate of interest changes as per the market dynamics. It is high risk repayment method. One can pay much more or much less than the amount budgeted for. However, floating rates are offered at lower rates than the fixed rates. Thus, borrower of a loan at a floating interest would highly benefit if the market dynamics make the interests go lower. Conversely, if market dynamics increase the interest rates then it wouldn’t be considered as the best option.

There are certain other charges that you should keep in mind. Processing fees and repayment charges are a part of every loan. It all depends upon your profile and credit history with the bank you intend to apply a loan for. However, before making a final deal it is important to look for all the nitty and gritty associated with applying for a loan. Always look for different banks and their offers so that you can choose the best loan option available.

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