As a business owner, personal loans can be a lifesaver if you find yourself in quick need of funds. A personal loan can help you manage your cash flow, invest in a new opportunity, cover expenses during tough times, etc. However, one key factor that can impact your loan is the interest rate. It is essential to understand how interest rates work, what factors influence interest rates, and so on, because interest rates determine the affordability of your loan and how much you will pay over time. 

Higher interest rates mean a higher total cost, whereas lower rates mean greater affordability. Interest rates can directly impact your small business in several ways. First, they determine how much you will pay back each month, affecting your cash flow. Second, a favourable interest rate can save you a substantial amount of money over the loan term. 

As a small business owner, you need to be smart about choosing a loan with the best rate to ensure long-term sustainability and financial stability. Understanding the aspects associated with personal loans for small businesses can help you make informed decisions. 

How Does Interest Work And What Factors Influence It? 

The interest rate is the additional amount you pay the lender when you borrow money. The interest rate you pay on your loan is determined by various factors, including:  

CIBIL Score: 

Your credit score is one of the most important factors that lenders consider when calculating your interest rate. When your credit score is higher, lenders are more likely to offer you a loan with a lower interest rate. On the other hand, a poor credit score could result in higher rates or even rejection of your loan application.

Your Business Financial Health: 

Lenders also look at the financial health of your business. If your business has stable and consistent revenue, you’re more likely to receive a loan with a lower interest rate. Maintaining profitability and a steady income stream is key to negotiating better loan terms.

Loan Amount and Tenure: 

The amount of money you borrow can have an impact on your interest rate. Larger loan amounts typically have higher interest rates because the bank assumes a greater risk. The loan tenure also impacts your overall interest rates. Although longer tenures may have lower EMI amounts, they can result in higher interest costs over time. 

Repayment History: 

Your repayment history on previous loans or credit cards may have an impact on your interest rate. If you have a track record of making timely payments, you may be eligible for a lower interest rate.

Age: 

Your age may also have an impact on the interest rate that the lender quotes. Younger people may be able to secure a lower interest rate on personal loans than people who are approaching retirement age. 

Types of Interest Rates on Personal Loans for Small Businesses

Personal loans come with either fixed or variable interest rates. A fixed interest rate remains constant throughout the tenure of the loan, whereas a variable interest rate can fluctuate depending on market conditions. Let us go over each in greater detail and see the main differences between them. 

Fixed Interest Rate: 

A fixed interest rate does not change throughout the loan. This means that the EMI (Equated Monthly Installment) you pay every month will not change. The main benefit of a fixed interest rate is the stability it offers. Knowing exactly how much you owe each month gives you the confidence to plan your budget.

Floating Interest Rate: 

Floating interest rates fluctuate based on market conditions or changes in the repo rate set by the RBI. If the market rate decreases, your interest rate may also drop, leading to lower monthly EMIs.

Difference Between Fixed and Floating Interest Rates: 

Fixed vs. Floating Rate of Interest: Which One Is Better For You? 

When choosing between fixed and floating rates, take your company’s risk tolerance and financial stability into account. Fixed rates are a better option if you value consistency and want EMIs that are predictable. On the other hand, if you are willing to take some risk for the chance of saving money, a floating rate might be suitable. While small businesses with tight budgets frequently choose fixed rates to avoid surprises, those with consistent cash flow may prefer floating rates.

The Current Interest Rate Trends For Personal Loans In India

As of 2024, personal loan interest rates range from 9.99% to 44% per annum. Rates fluctuate due to economic factors such as the RBI’s monetary policies and changes in repo rates. A rising repo rate could lead to an increase in loan interest rates, while a decrease may lower rates. 

On October 9, 2024, the RBI maintained the repo rate at 6.50% for the tenth consecutive time.  The RBI’s decision was expected given the ongoing inflation concerns and global geopolitical uncertainties. However, some economists believe the Reserve Bank of India (RBI) will cut the repo rate in the coming months. 

Current Interest Rate on Personal Loans

Here’s a quick comparison of interest rates (as of 18 October 2024) from some leading lenders in India:

How to Get Lower Interest Rates on Personal Loans for Small Businesses

Here are some suggestions for obtaining a personal loan at the lowest possible interest rate. 

Improve Your Credit Score: 

Your credit score indicates your creditworthiness. Banks and financial institutions provide the lowest personal loan interest rates to applicants with high credit scores. Therefore, you should check your credit score before applying for a personal loan. If your credit score is less than 750, you should look into ways to improve it. If your credit score is higher than 750, you are more likely to be approved for a low-interest personal loan.

Compare Lenders:

Never go for the first offer you get. Instead of applying to a specific bank for a personal loan, you should compare the personal loan interest rates charged by various NBFCs and banks. This will enable you to obtain a personal loan at a competitive interest rate.

Negotiate With the Lender: 

If you are an existing bank customer or have a good relationship with the loan provider, you can negotiate for the lowest interest rate possible. When doing this, it is best to make a formal written request to the loan provider.

Avoid Missing Repayments: 

If you do not make loan or credit card payments on time, your credit score may suffer. Loan providers usually consider your repayment history when determining personal loan interest rates. Those who have paid their previous EMIs and credit card bills on time are more likely to be charged a lower interest.

Keep an Eye On Offers: 

Banks and financial institutions typically offer special interest rates for a limited time during the festive season. If you apply for a loan while such an offer is active, you may be eligible for a lower interest rate.

Conclusion 

Understanding personal loan interest rates is very important for small business owners who want to manage their cash flow effectively. By carefully considering factors such as the type of interest rate, your CIBIL score, and your company’s financial health, you can make more informed decisions that will benefit your company in the long run. Securing a favourable rate not only lowers the overall cost of borrowing but also helps to maintain consistent cash flow, allowing your business to thrive.

At Kreditbazar, we’re committed to helping small business owners find the best personal loan deals tailored to their needs. By effectively collaborating with multiple industry-leading NBFCs and offering professional financial consultation and services through our in-house experts, Kreditbazar simplifies the loan process and helps you secure competitive interest rates. Whether you’re looking for expert advice to improve your CIBIL score or want to compare lenders, Kreditbazar is here to assist you in making smart financial choices for your business. Explore your options today and take charge of your company’s financial future.