Loan is one of the major services that a bank offers its customers. Banks provide different loan schemes and plans that suit the needs of the customers applying for the loan. There are various types of loans: personal loans, home loans, auto loans, education loans, loans against property and loans against gold ornaments. Of course, the bank levies a certain interest rate on the loan it provides, which is the amount the it gains for providing the service. The interest rate on the loan is subject to several factors on which the bank levies the interest rate on your loan.
Your CIBIL score plays as an important factor when it comes to your bank levying interest rate on your loan. If the borrower has a high credit score chances are that he or she will get the loan sanctioned at a lower interest rate. On the other hand, if the borrower is having a low credit score, then the bank will charge a high interest rate, since a low credit score is an indication that the individual is a defaulter when it comes to loan repayment.
The bank will take into consideration the applicant’s record of repayments made for past loans taken from the bank. If the individual has been paying the EMIs in a timely manner for loans taken from the same bank in the past, the borrower can benefit from lower interest rate. However, if the applicant missed paying an EMI in the past, then chances of getting a low interest rate on the loan is minimal. So keep a disciplined track record to avail lower interest rates.
The duration of the loan
The duration or tenure of the loan also is an important criteria when it comes to interest rate levied on the loan. If the applicant applies for a loan for a shorter duration, the risk associated with the same is lesser, thereby reducing the interest rate on the loan. For term loans or long tenure loans, bank levy heavier interest rates since the loan have risk associated with them (except home loans).
Collateral is the asset that is kept with the lender to secure a loan. Since an asset is in the possession of the lender till the full repayment of the loan, a loan is generally devoid of chances of default from the borrowers end. It is because of this factor that the bank levies low interest rates on loans with collateral than on loans without a collateral.
The borrower’s incomes is a factor that most banks consider before sanctioning a loan. It is with the income amount that the bank determines the individual’s repayment power. If the income is high, then the rate of interest by the bank is low on the loan.
Banks are more likely to adjust their interest rate according to the trend that is being followed by its fellow competition. So if a bunch of banks levy a particular interest rate, then chances are your bank might levy the same interest rate.
If the borrower has been availing most of his or her financial services from the same bank, chances are that the bank might lower the interest rates on your loan to acknowledge the customer’s loyalty. This also ensures that the bank does not loose onto an old customer to competition.