Why do banks charge higher rates for personal loans?

Personal loans can be used for many purposes such as medical emergencies, home repairs, and higher education. One of the biggest advantages of personal loans is that they are unsecured, which means they do not require any collateral. This makes personal loans an attractive option for borrowers with no assets to use as security.

Another benefit of personal loans is that they can be processed very quickly. In many cases, you can get the funds within 24 hours. This is extremely helpful if you have an unexpected expense or need to make a last-minute payment. However, lenders typically charge higher interest rates for personal loans than for other types of loans. And there are many reasons why lenders cannot provide lower personal loan rates. The reasons are:

  1. Personal loans require no collateral

The first is that personal loans are unsecured, which means they are not backed by collateral. This makes them riskier for lenders, who may be less likely to get their money back if the borrower defaults. Thus, lenders typically charge higher interest rates on personal loans to offset this risk.

  1. NPAs for lenders

Borrowers have to meet basic personal loan eligibility criteria and submit minimal documents to avail this loan. Thus, personal loans usually see higher default rates than home or car loans. Due to this, lenders face an increased percentage of NPAs (Non-Performing Assets).

NPAs refer to loans that are in default or in arrears. In the event of a default on a secured loan, the lender can auction off the property to recover some of its losses. However, there is rarely such an opportunity with personal loans. Thus, lenders charge higher interest rates on personal loans to compensate for the increased risk.

  1. Personal loans offer instant disbursement of funds

Most people take out personal loans in case of a financial urgency. This could be due to debts, medical bills, wedding expenses, or other big purchases. And the main reason to go for personal loans is that they offer fast approval and payments, which is helpful when you need quick cash. Some lenders may even disburse the funds within 24 working hours.

How to find the best interest rates on a personal loan?

Various lenders offer different interest rates on personal loans thus affecting your EMIs (Equated Monthly Instalments). You can use a personal loan EMI calculator to calculate your pay-outs and, plan your loan and repayment easily.

It is an online tool offered by various financial institutions to calculate your monthly EMIs in just a few seconds. All you need to do is enter the loan amount, interest rate, and tenure, and the calculator will give you an estimate of the monthly instalments you need to make. This way, you can easily compare differentpersonal loan interest rates and choose the one with the lowest EMI.

To sum up

When you are short on funds or require the money quickly, a personal loan can come in handy. But with flexibility like no collateral and no restrictions on usage, there come high-interest rates. Thus, it’s important to compare various personal loan lenders and find the one that offers affordable interest rates.

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