When you take a loan, you will be repaying more than the amount you borrowed. This is because the lender loses the opportunity to use the money as you borrowed it for a certain period. The additional amount you pay is compensation for that loss.
Personal loan interest rates are applied to all borrower and lender transactions. The interest rate is a percentage applied to the amount of a personal loan. Depending on the repayment frequency and period you choose, you will be repaying the agreed part of the principal amount plus the interest rate for the duration of the loan.
Different Types of Interest Rates
The two types of interest rates offered are fixed and variable.
When you get a personal loan on a fixed interest rate, the repayments you make for the complete term of the loan remain fixed. So you know beforehand, the amount that you have to pay in every installment.
On the other hand, with a variable interest rate, the repayment amount could change over the loan term. Benchmark interest rates and indexes can change the financial market. They, in turn, cause the variable interest to go up or down. Thus depending on the interest rate trajectory, your repayment could also go up or down.
According to the statistical data by RBA, as of February 2020, the average fixed personal loan interest rate was 12.46%. The average variable personal loan interest rate was 14.41%.
Factors Affecting Personal Loan Interest Rates
A credit score is often considered a crucial factor by lenders when evaluating your application. The score takes into account the money you have borrowed, whether you repaid on time, and the number of credit applications, among others.
The risk for the lender reduces when you have a high credit score, and you could get a reasonable interest rate on the personal loan. However, the credit score offered by different agencies could vary. So, when applying for a personal loan, check if the credit reporting agency is approved by the lender.
Other factors that affect loan interest rates include employment history, sources of income, and current monthly expenses.
Example of Personal Loan Repayment
If you take a personal loan of $10,000 for a term of one year at an interest rate of 12.99%, you will have to repay $10,717.51. $717.51 is the total interest rate amount. You will be paying $893.13 per month over the year to repay the loan entirely.
The calculation does not include any additional fees that the bank could charge. The interest rate offered is also subject to change depending on your unique financial situation.
For example, the interest rates on personal loans by digital banks such as Alex Bank start from 4.99% and go up to a maximum APR of 19.99%. So with an excellent credit score, you could get a personal loan at one of the best and competitive interest rates in the market.
To sum it up, personal loan interest rates could be fixed or variable, or high or low, depending on your creditworthiness and borrowing capacity, among other things.
Digital banks offer you a personalized interest rate after considering your current financial position. You can also make use of the personal loan calculators available online to understand how the interest rate works.