You have heard the term before and may even know it. But how much do you know about interest rates and the aspects they cover in an instant loan personal loan? Understanding financial jargon can help you make better overall financial decisions and improve your financial wellbeing.
Let’s break down the interest and its various elements so that you can improve your financial know-how.
What is interest?
Put simply, the interest is the cost of borrowing. Imagine loaning your friend 500 and asking them to repay that amount in 2 months. You can repay this amount in installments. However, you asked your friend to pay an additional ₹ 25 for each installment when they repay the amount. This additional sum is the so-called monthly interest rate.
Before you apply for an instant loan, let’s cover the definitions of various interest-related terms so that you can more easily understand the process.
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Interest rate terms you should know
- Rector – To make this easier to remember, the word “Principal” itself is a great clue as it has a different meaning for the word “First”. The principal amount is the initial amount that you borrow from the lender with no additional interest.
- Interest rate – An interest rate is an amount that a lender charges a borrower for using certain funds or assets. Interest rates are generally a percentage of the principal and are based on the amount of principal you borrowed. This additional amount or “interest” charged by the lender is used to cover his loss of money during the period that the borrower has used it. The lender could have used this amount for other purposes, but instead loaned it to the borrower, incurring a debt cost.
- Capitalization – Capitalization is when a borrower skips paying interest. The unpaid interest is added to the principal so that it can be repaid by the borrower. If the repayment is postponed, the interest will accrue on the main amount until repayment.
How do I get a low interest rate?
This is where your credit history comes in. When a friend asks you to borrow money, you are likely thinking about the other times you’ve lent them money. Did they pay you back on time? Have the repayments been postponed too often? All of these questions play an important role in deciding whether to loan them the money they requested.
Before approving your loan, lenders will check your CIBIL score, which is your credit report. This will give them an idea of your repayment history and whether you are a worthy candidate for an instant loan. If deferred payments are found in the past, the lender can either reject your application or charge a higher interest rate. Borrowers who are considered low risk are charged lower interest rates than high risk borrowers. This is why it is best to manage your finances well so that when you apply for an instant loan, you can be sure of getting a low interest rate or a higher credit limit.
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How do I choose a lender with an interest rate that suits me?
Before applying for an instant loan, make sure that you identify the right lender so that you don’t fall into a debt trap or end up on a fraudulent platform cheating you out of your hard-earned money. You can turn to lenders like banks, NBFCs, or trusted FinTech companies. Since each institute has different eligibility requirements, as well as loan amounts and interest rates, it is important that you compare the pros and cons of each institute so that you can make an informed decision. Check the eligibility of your chosen lender depending on the size of the loan, the interest rate offered, the documentation requirements, the length of the disbursement process and the eligibility conditions.
While the concepts behind financial terms are relatively easy to understand, the terms themselves can be confusing for those first-time learning to manage their finances. The only rule to keep in mind is “knowledge is power” and as you expand your vocabulary these concepts will become easier to navigate.
When applying for an instant loan, don’t be put off by words like “high interest”. Instead, think of applying for a loan like buying a phone. Whenever you buy a phone, you definitely want to choose a phone from a trusted brand that is affordable and that will suit your needs as well. The same goes for choosing your loan; Before making your decision, weigh the pros and cons of your lender, interest rates, etc. If you apply for a loan with this setting, you are sure to find interest rates that suit you in order to keep your credit score healthy.