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11 APRIL, 2022
You would always want to get an affordable interest rate while availing a personal loan. But the term affordable can create confusion. You could be searching for an affordable interest rate online, but have you ever thought about, what exactly is a low-interest rate? Is it the interest rate charged by lenders themselves, or are there other factors that determine your interest rates?
If you are unaware of the meaning of an affordable interest rate, it could be hard to get the best personal loan interest rate. Here is a brief guide on the meaning of affordable interest rates and the factors that affect them.
What Do You Mean by a Personal Loan And Its Interest Rate?
A personal loan is an unsecured loan that you can avail to meet your varied needs. You can use a personal loan to arrange funds for needs, like debt consolidation, home renovation, medical emergency, wedding, travel plans, etc. You need not furnish any collateral or security to avail a personal loan.
The interest rate is the amount you pay to the lender for borrowing money from them. The interest rate is measured as the percentage of the loan amount. You pay interest on the amount you borrow. Therefore, when you repay the loan, the total repayment amount has two components - the principal or the loan amount and the interest on the principal.
What Are the Affordable Interest Rates for a Personal Loan?
Though there is no set rule or standard structure for defining an affordable rate, you can analyse it based on the existing lending rates in the country. The repayment amount you pay annually is based on your Annual Percentage Rate (APR). This APR is the total amount of interest that you pay annual towards your loan. Therefore, the best and most affordable interest rate is one where your APR is the lowest.
Your interest rates are based on various factors, like your income, credit score, employment history, etc. Even though a lender is offering a low-interest rate, it does not automatically convert to an affordable rate for you. Lenders scrutinise your financial profile, age, income, etc., before determining the interest rate for you. Typically, if you fulfil the eligibility criteria of the personal loan and have a credit score above 700, you can get a low-interest rate.
Getting an affordable interest rate for a personal loan surely means lower EMI. However, your cost of borrowing is not only dependent on the interest rates. Many other costs like administrative fees, processing fees, etc., add up to your total loan amount. Therefore, while you look for the best loan, you must consider all the aspects of the loan.
To Sum Up
Interest rate is one of the most important factors that borrowers look for when planning to take a personal loan. When the interest rate is affordable, it helps repay the loan faster and reduces the cost of borrowing. Therefore, it is crucial to understand the meaning of an affordable personal loan interest rate.
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