Interest rates on loans are a complex scenario in India. There are different lenders in the market offering loans at different rates of interest. That’s not all. Each lender offers loans to different borrowers at different rates of interest. So, here, you will find out what factors affect the business loan interest rate in India. This will help you make an informed decision when you need funds for your own venture.
- Rate of Inflation – Inflation increases the prices of goods and services, as you already know. The value of currency declines and so does the purchasing power of people. This automatically causes the rates of interest to rise. As a responsible borrower, you should monitor the economic fluctuations to keep track of rates of inflation. This way, you’ll know the best time to apply for a loan.
- Monetary Loans – Sometimes, the RBI may announce some changes in the monetary policy, to maintain liquidity and control inflation. The RBI may relax the monetary policy to ease the liquidity in the system, and when this happens, the loans will become cheaper.
- Demand and Supply of Credit – The business loan interest rate in India is also impacted by the demand for and supply of credit. When the demand for loans increases, lenders will naturally charge higher rates of interest to take advantage of the situation. Similarly, the rates decrease when the supply of credit exceeds the demand for it. Thus, the best time to apply for a loan is when the demand is low and supply is high.
- Secured or Unsecured Business loan – This is a major determinant of interest rates. The nature of loan i.e., whether the loan is secured or unsecured, is one of the major factors affecting the rate of interest. Secured loans are backed by collateral for security, which means that in case of default, the lender can seize the asset to recover the loan. The risk to the lender here is much less and therefore the rate of interest is also low. On the other hand, in case of unsecured loans, there is no collateral, which means more risk for the lender. Accordingly, the rate of interest is higher when it comes to unsecured loans.
- Credit Score – The credit score is allotted by rating institutions, based on the borrower’s profile, his credit history etc. A higher credit score indicates better ability on the borrower’s part to repay the loan. A lower score on the other hand means a weaker profile, which may affect the borrower’s ability to repay the loan.
- Type of Business – Financial institutions have their own parameters to assess your business and its profitability. They classify some businesses to be riskier than others, and accordingly, the rate of interest charged also differs. Risky ventures will command higher interest rates as compared to others.
So, there are a number of factors that affect the rate of interest on business loan. Some of them are in your control, while others are external, which are beyond your control, like the rate of inflation, monetary policy etc. Nevertheless, it always helps to be aware of all the factors that affect the business loan interest rate in India.
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