What are the Interest Rates on Long-term Personal Loans?

What are the Interest Rates on Long-term Personal Loans?

The funds required for big-ticket expenses like weddings, medical surgeries, or vacations can burn a hole in your pocket. Instead of dipping your savings or redeeming your investments, you can avail of a personal loan to fund these expenses.

One of the most important components of your personal loan that you need to decide at the time of availing it is its repayment tenure. Based on your financial requirements and capabilities, you can choose either a short-term or a long-term loan.

What is a Long-term Personal Loan?

Long-term personal loans, as its name suggests, are credit solutions that have long repayment periods, up to seven years. This results in lower Equated Monthly Instalments (EMIs) that you will have to pay to service your loan.

However, note that there is a drawback to adopting a long-term loan. The longer the tenure of your personal loan, the higher will be the total interest payable. Moreover, since these loans are unsecured in nature, the personal loan interest rates are generally higher than other secured lending options.

Types of Long-term Personal Loan Interest Rates

When availing of this loan, one of the most important components that you must look at is the type of personal loan interest rate. The type of interest rate charged on your loan also determines the total interest you will pay during the repayment period.

The following are the two types of personal loan interest rates:

Fixed Interest Rate
A fixed or flat interest rate is a type of interest rate that is predetermined at the time of sanctioning the loan. It remains fixed throughout the tenure, and hence, you have to pay a fixed amount of EMI for your entire repayment period.

Floating Interest Rate
Floating or variable interest rates fluctuate depending on the prevailing Marginal Cost of Lending Rate (MCLR). This reference rate is regulated by the Reserve Bank of India. Your personal loan interest rate will fluctuate whenever the RBI revises these rates.

For instance, if the RBI reduces the reference rate, you will have to pay a lower amount as your monthly obligation towards the loan. However, if the RBI increases these rates, the interest rates will also shoot up.

Factors Influencing Personal Loan Interest Rates
Since personal loans are not secured, lenders assess your ability to repay the personal loan quite strictly. Some of these factors may also influence the personal loan interest rate. Following are some of the factors.

Type of Lender
One of the most important factors that will determine the interest rate on your personal loan is the lender you choose. Different lenders offer personal loans at different interest rates. You can choose a lender that offers the best terms and low interest rates.

Loan Amount
There is a higher risk factor involved for the lenders if you require a high quantum of funds. So, lenders tend to offer higher interest rates on higher loan amounts. This allows them to offset the risk of lending by charging you a higher rate of interest.

Repayment Term
On long-term loans, lenders tend to lose on any possible interest rate hike in the near future. To compensate for this loss, lenders generally levy higher interest rates on long-term loans.

State of the Economy
The state of the market is another factor that determines the rate of interest. For instance, if the inflation rates are higher, the interest rates may be unfavourable to begin with. This only gets worse when availing a long-term loan.

Credit Score
Since personal loans are unsecured in nature, lenders rely on your credit score to discern your creditworthiness. They also check your repayment history to assess the risk factor. If your credit score is high, the lender may provide you with a lower interest rate, and vice- versa.

Debt-to-Income Ratio
To determine your personal loan interest rates, lenders also assess your debt-to-income ratio. The debt-to-income ratio shows the proportion of your gross income that goes towards servicing your total debt. The lenders may offer you lower personal loan interest rates if your debt-to-income ratio is also low.

In conclusion, if your financial capabilities do not allow you to repay your loan quickly, you can also opt for a long-term loan. The total amount that you will have to pay as repayment of the loan is spread evenly across the tenure.

However, you must also note that you will end up paying higher total interest charges if you opt for the latter lending option. In any case, plan before you borrow and optimise your outgo for efficiency.