When you apply for a personal loan, the personal loan interest rate offered to you by the lender determines how much the loan will cost you. While a few factors such as your creditworthiness and repayment capacity, as determined by your credit score and income respectively, play a huge role in deciding what interest rate you will be offered, there are also certain macro-economic factors at play. Some macro-economic factors such as the repo rate and state of the economy influence the personal loan interest rates offered by lenders.

Here are all the macro-economic factors that you need to know about that play a role in determining your personal loan interest rate.

1. Repo rate

Repo rate is the rate at which the Reserve Bank of India (RBI) lends money to commercial banks. When the RBI increases the repo rate, banks in turn increase the rate at which they offer loans. Hence, in a high interest rate environment, the personal loan interest rate will also be high. Conversely, if the RBI lowers the repo rate to increase the flow of credit in the economy, lenders too will lower the personal loan rates. That’s because the difference between the repo rate and the personal loan rates is how lenders earn profits.

2. Inflation level

The higher the inflation level in the economy, the higher will be the personal loan interest rates. That is because too much inflation is bad for the economy as it increases the prices of goods and services and erodes the value of the money people hold. To combat inflation, the RBI raises its key interest rates like the repo rate to discourage individuals and companies from borrowing and reducing spending in the economy to bring down prices and thereby inflation. And when the repo rate increases, the personal loan interest rates also increase.

3. State of the economy

When the economy is booming and there is growth, people are more inclined to take on risks and hence borrowing, spending, and investing all see a spike. When more people are borrowing, lenders can raise interest rates as the demand for credit is high. However, when there is an economic slowdown and people cut back on borrowing and spending, lenders may reduce the personal loan interest rates to encourage individuals to borrow money. This way the state of the economy influences the personal loan interest rates offered by the lenders.

Some other macro-economic factors that can influence the personal loan interest rate offered to you are government policies, global economic factors, and credit market conditions. Hence, it’s important to be aware of such macro-economic factors, in addition to your credit score, while applying for a personal loan. Also, make sure to use a personal loan EMI calculator before you hit on the personal loan apply button to ensure that you can comfortably pay off the loan in a timely manner. Since a personal loan EMI calculator gives you an estimate of what your EMI obligation will look like, you can plan for it accordingly for better debt management or make changes in your loan tenure or loan amount to make the necessary changes in your loan EMI.

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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.