There are many factors to consider when a financial institution calculates the interest rate you will have to pay for a loan. Such factors are:
1. Central bank loan interest bank policy
The central bank is usually the financial monetary board of the land who sets the interest rate level which all central banks must adhere to. To stimulate the economy (in times of recession or economic slowdown), the central bank may lower interest rates to promote business growth and expansion rather than savings.
2. The total value and tenure of the loan
High value loans and long tenures usually equates to higher interest rates. This is because the longer you take to repay the cash loan and the higher value of it means that you will have to pay substantially more for each rupee borrowed as apposed to a smaller sum and tenure.
3. Personal credit history and previous settlement status
If you have a positive personal or business history with the lending institution, it may be likely that they may offer your slightly discounted or preferential rate on your future loan amount. This is because they may have evaluated you as a low risk individual; and be less likely to default on future loans based on your credit history.
4.Type of financial assistance
Usually personal loans are a fetch a higher interest rate. If, however you are seeking a long-term loan to buy or build a house, it has a greater likelihood that you maybe offered a lower interest rate. This too might be due to a combination of factors such as central bank (and/ or government) policy, the usage of land/ construction structure as collateral, etc. Student loans usually command lower interest rates too.
5. Availability of a collateral or guarantors
Upon taking loans, there is a greater likelihood that the financial institution will offer you a lower interest rate if you can support the loan by having a collateral with the bank. This is because in an event of a default, the bank can liquidize your collateral for the outstanding funds you owe to the bank The same principle is with having signed guarantors where the bank can look at securing its outstanding payments from you through the individuals who has signed on as guarantors.