Personal loans can be powerful financial tools for those that desperately require a large amount of cash. If you are considering the possibility of applying for a personal loan you should have a solid understanding of the market to ensure that you find a good deal. In this article, we outline the average cost of personal loans in India in order to help you get your bearings and ultimately navigate the complicated personal lending market.
- Average Cost of Personal Loans in India
- Average Interest Rates Depend on Your Financial Situation
- Fixed or Floating Interest Rate?
- Average Personal Loan Fees
- Monthly Installment & Total Cost of Borrowing
Average Cost of Personal Loans in India
Because interest rates in India are typically advertised in wide ranges (i.e. from X% to Y%) it is difficult to provide a precise estimate of the average rate that you might be offered. However, we can provide average ranges offered by banks in India by loan and interest rate type as well as explain factors will help you predict what type of rates you might receive. For instance, the average range of interest rates offered by lenders in India for personal loans range from about 12% to 20%. Within this range rates depend on a range of factors, which we discuss in-depth below.
Average Interest Rates Depend on Your Financial Situation
In order to more accurately predict interest rates that you might be charged for your personal loan, it is important to compare loan offerings based on your employment status. For instance, some of the best loan rates are offered to pensioners, at 12% to 12.5% on average. Also, salaried employees are offered more competitive rates than self-employed or non-salaried individuals.
We also noticed that advertised rates for low-income individuals (less than Rs. 10,000 per month) are relatively low at about 12% to 13% p.a. We credit this to a relatively small sample of banks that offer loans to this group; conversely, there are many more loans for salaried employees which helps to explain the large range of rates for these borrowers. We also caution all borrowers to always check the details of a loan offer before expecting any particular rate.
Fixed or Floating Interest Rate: Which is Better?
When comparing loan rates, it is also essential to understand the difference between fixed and floating interest rates. Fixed rates guarantee a set interest rate during the loan tenure, while a floating rate may change based on market rates. Lenders tend to charge a premium for fixed interest rates, given the additional risk that they face if market rates increase significantly during the loan as well as the added security provided to borrowers in case of increasing market rates. These general trends are reflected in the current rates of personal lenders in India, shown in the table below.
|Interest Rate Type||Average Low End Rate||Average High End Rate|
There is never an absolute rule for deciding between fixed and floating interest rate loans. However, it is generally wise to choose a fixed rate when you expect interest rates to rise during your loan tenure and floating rates when rates are stable or declining. This is because borrowers stand to benefit from decreasing rates with a floating rate loan as their interest payments may also decrease. On the other hand, they face the risk of higher interest costs if market rates increase as their rates are not locked in.
Average Personal Loan Fees
In addition to making sure that you find a low interest rate, it is also important to be aware of processing fees when signing up for a personal loan. These fees may seem insignificant, but can actually significantly increase your total cost of borrowing. In India, personal loans typically charge flat fees that range from about Rs. 100 to Rs. 1,000 or a percentage of the loan amount. Once you've decided how much money you need to borrow, you can compare loan fees across lenders.
|Average Processing Fee for Personal Loans|
|Absolute Dollars||Rs. 500|
|Percentage of Loan Amount||2% - 2.5%|
Monthly Installment & Total Cost of Borrowing
Once you've narrowed your list of potential loans, you must consider two primary factors to ensure that you will be able to comfortably repay your loan. First, you should make sure that your loan has monthly installments that you can afford to pay every single month of your loan. If you are concerned about the required monthly payment it is possible to choose a longer tenure and spread out the financial burden over a longer period of time. However, this will end up costing you more in terms of total interest, so you must weigh these factors carefully. Finally, the best way to compare similar loans is to compare the total cost of borrowing. For most borrowers this consists of interest payments and processing fees, but it is important to be aware of any other fees that you believe you are likely to incur.