Interest Loan Rates

By: EconomyWatch Content   Date: 4 November 2009

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Interest rates on loans are the cost incurred by the borrower for using the funds of the lender. Interest loan rates are determined on the basis of the nature of the loan, the time, the duration and the conditions attached to it, besides the agreement between the lender and the borrower. Financial institutions and banks generally decide the interest rates on the various categories of loans on the basis of the prime lending rate set by the central bank of a country.

Interest Loan Rates and the Type of Loans

Interest rates on loans depend on the terms and conditions associated with the loan. The interest rates on secured loans are generally lower than those for unsecured loans, since the former have the provision of keeping collateral.

Secured loans require the borrower to keep some asset as collateral with the lending agency. This collateral can be sold off to recover the money lent if the borrower fails to repay the loan amount. Secured loans can be in the form of a mortgage loan, car loan, stock hedge loan or pre-settlement loan, and are considered safer than other types of loans.

Unsecured loans are not secured by any of the assets of the borrower and thus carry higher interest rates. Such loans can be in the form of credit card debt, personal loan, education loan, bank overdrafts, lines of credit and corporate bonds.

Demand loans are short term loans with no fixed repayment dates. The interest rate on such loans is not fixed and varies with the prime or base rate. These loans can be called for repayment any time and may be secured or unsecured.

Interest Rate Loans and Duration of Loans

The duration and amount of a loan are the key determinants of the interest loan rates. The longer the duration, the higher is the interest rate. In some cases, the interest rate is fixed for a certain period, for instance five years, and then increased for the next five years and so on. The interest rates on loans may also vary according to the financial position of the borrower, the type of loan, the value of the collateral and the level of competition amongst the banks.


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