Why are Interest Rates Higher on Personal Loans?

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A Personal Loan is an unsecured loan that is taken to meet the financial needs without submitting any collateral or security, it also does not need a guarantor to avail the loan. You can use a personal loan to fulfill any of your needs such as wedding finances, trips to various places, medical emergencies, and many others.
Though you can avail of the personal loan easily, it comes at a high-interest rate which typically ranges above 10 to around 35 depending upon the customer credit history and credit report.

Three main reasons why the personal loan interest rate is higher are:

  • No Collateral Requirement: SARFAESI ACT 2002, allows banking and financial institutions to cease or auction auto, home, commercial property to minimize the financial risk if the customer defaults car loan, home loan, and commercial loan respectively. But for personal loans, there are no collaterals involved in the loan process hence, lending institutions do not have a fixed guaranteed income from the customer, because of that the risk is very high. Because of these high risks, personal loan interest rates are higher.
  • NPAs for Banks: Personal loan default rate is quite higher than other loan types because a personal loan is an unsecured loan that leads to high Non-Performing Assets for the bank and to compensate the high NPAs, the personal loan interest rate is kept higher than other loans because the bank also needs to have the healthy financial condition to run the business smoothly.
  • Urgent requirement of the customers: Most of the customers who opt for a personal loan are in urgent need of the loan, urgent need to pay off your medical bills, travel costs, wedding or paying off your debt makes the customers opt for a personal loan. Banking and financial institutions take advantage of this situation and that is why the personal loan interest rate is charged higher from these customers which also helps to bring down NPAs and this is the only product where banking institutions levy an extra charge.
Personal loan interest rate is higher mainly because of the above 3 reasons.

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