Interest Rate Loan

The interest rate on a loan is dependant on several factors including the base rate, the nature of the loan, the duration and the amount of the loan, besides the agreement between the lender and the borrower. An Interest Rate Loan may be fixed or floating depending on the terms and conditions agreed upon by the lender and the borrower.

 

Interest rates on loans represent the cost of borrowing and it varies according to the nature of the loan. Although the interest rates on all types of loans are set in accordance with the base rate or the prime lending rate which is set by a country’s central ban, they vary from bank to bank. This is because of individual factors related to the lending agency, the level of competition and the terms and the conditions associated with the loan.

 

The interest rate on loans that are secured by collateral such as mortgage interest rate is generally higher than the unsecured loans reflecting the level of risk involved. The collateral reduces the risk of the lender since it can be sold off to raise funds in case the borrower fails to repay the loan amount.

 

However, in case of unsecured loans, no collateral is available, thereby making them more risky. This way, lenders seek higher interest rates on such loans. Credit card debt and bank overdraft facilities come under the category of unsecured debt and thus carry high interest rates.

 

The duration and the amount of the loan are also the key determinants of the interest rate applicable. The longer the duration of repayment, the higher is the interest rate being charged as it takes into account the impact of inflation. Similarly, the loans of higher amounts carry higher interest rates than small amount loans.

 

The interest rate on loans can be fixed or floating. Floating interest rates increase or decline with the changes in the base rate. This results in changes in the repayable amount or schedule. Fixed interest rate loans are preferred when interest rates are unlikely to change much or when the duration is small. Floating interest rate loans are preferred when the interest rates are likely to decline in the foreseeable future.