Why are personal loan interest rates so high?

@ayana_weissnat You can avail of personal loans for any “personal” purpose. It could be your wedding or buying anything big, paying some bills, or clearing off any debt. The borrower is free to use the money that they take up as a personal loan for any purpose. However, you must keep in mind that while applying for the loan, you have to mention the purpose to the bank. A bank usually looks up two factors when they sanction a personal loan. First - is the profile of the borrower and their repayment capacity. The second is the credit score of the borrower.

Personal loans usually come with a very high-interest rate. The overall rate varies as per the country. The annual percentage rate is very high in the case of personal loans. This is also one of the core reasons why people abstain from taking up personal loans. Personal loans are also attributed as unsecured debts. If we decode this language - it roughly means that the borrower is not submitting any collateral or asset to the bank for claiming this debt.

The primary features of a personal loan are a very high rate of interest, very short repayment periods, and rigid eligibility criteria. Here is the reason why interest on personal rates is so high:

NPA

As already discussed, personal loans are unsecured debts. In simple words. Unlike home loans or car loans where the bank keeps the house or car papers as mortgage until the repayment of the loan, personal loans do not involve any security deposit. That means there is a greater risk for the bank. So, banks increase the interest percentage to compensate for this insecurity.

Taking Advantage of Urgent Need

Granting personal loans is a profitable business for the bank. Usually, the borrower is in a dire emergency situation when they opt for a personal loan. Banks take advantage of this urgent need of the borrower and offer them loans at personalized interest rates. Also, the repayment capacity of the borrower makes a difference in the interest rates.

No Collateral

There is no collateral needed for personal loans hence there is no guarantee whether the bank will get back the amount or not. Also, there are a huge number of home loan defaulters. To compensate for this insecurity, banks levy very high-interest rates on personal loan amounts.

Personal loans can be helpful but involve various skeptical parameters. Ensure to check all of them before applying for a personal loan.