Personal loans from the same bank can be offered at different rates to the different customers because it depends on the reason for the loan as well as on the time period of repayment of personal loans. This is because the banks determine their interest rates which are based on the individual’s profile and other details.

Personal loan

  • Personal loans are unsecured loans where an individual does not have to provide any collateral with the financial institution from which he borrows.
  • As compared to the secured loans the unsecured loans are usually more expensive.
  • The banks don’t keep any collateral which they can pledge in case individual defaults.
  • A personal loan would be more expensive than a home loan.

Interest Rate Policy

  • Banks are generally free to determine the interest rate they would pay for the deposits and charge for loans, but they must always take the competition into account, as well as the market levels for the numerous personal loan interest rates and policies.
  • The Reserve Bank of India influences interest rates by a set of certain rates, stipulating the Cash Reserve Ratio and Liquidity Reserve Ratio requirements and also by buying and selling of risk-free bonds.
  • Risk-free bonds are also known as Treasury Bonds.
  • The term is used to indicate that these are among the safest bonds in existence because they are guaranteed by the Government of India.
  • Other considerations that the banks may take into account are
    • The expectations for inflation levels
    • The demand and velocity of money domestically and internationally
    • The stock market levels, and

Market-based Factors

  • The banks look to maximize the interest rate by determining the steepness in the yield curves.
  • The yield curve however basically shows in graphs. It shows the difference between short-term and long-term interest rates.
  • Generally, a bank looks to either borrow, or pay the short-term rates to the depositors, and then lend, through the making of the loans, at the longer-term part of the yield curve.
  • If a bank can do this successfully, then it would make money and please shareholders.
  • Smaller markets may have higher rates due to less competition.
  • However, the fact that the loan markets are less liquid and they have a lower overall loan volume.

Client Inputs

  • A bank’s prime rate is the banks charge to their most creditworthy customers.
  • Studies have demonstrated that when a customer made the large initial down payment, then he or she has sufficient “skin in the game” to not walk away from a loan during the tough times.
  • The fact that the consumers put a little money down and even take the loans with negative amortization schedules.
  • Longer duration comes with a higher risk because the loan may or may not be repaid. This is thus generally why the rates of long-term loans are considered higher than the shorter ones.
  • Banks also look at the overall capacity for the customers to take on debt.

The Bottom Line

  • They are looking to maximize profits for their shareholders.
  • On the flip side, however, the consumers and businesses seek the lowest personal loan interest rate which is possible.
  • A common-sense approach for getting a good rate would thus be to turn the above discussion on its head.