Real-time factors affecting interest rates on instant cash loans
So far, while acquiring an instant cash loan
or other loans, you would have seen different interest rates, and the interest rates keep inclining and declining over time. So, who defines this interest rate? The interest rates are not set by the lenders alone. It is the participation of the entire world, including you and me. A small illustration to understand this, when I borrow money and fail to repay it, then the interest rate changes globally because by defaulting, I am decreasing the number of credits available in the market and hence, the interest rate goes up. Likewise, nine factors define the interest rates. Six are involuntary, and three are voluntary.
Let's first learn more about the involuntary factors in details.
Demand & Supply: Demand is directly proportional to the interest rate, and supply is inversely proportional to the interest rate. We know when a commodity is in demand, the entity that owns the commodity increases its price to earn more profits. Applying the same principle on money, when more people want to borrow money for respective reasons, the lenders will increase the interest rate to earn more profits.
Also, when there is an excessive supply of a commodity, the vendors reduce the price to make sales. The same principle also governs the interest rates. When nobody is borrowing, then the lenders offer low-interest rates to attract as many borrowers as possible.
Fiscal deficit: The difference between the government’s total revenue and total expenditure is known as fiscal deficit. You must be pondering how does fiscal deficit influence the interest rates? The Indian government signed the globalization deal in 1991, and this got us in an open economy. In an open economy, we can trade goods with other countries. This also means we can borrow or lend money to and from other countries. When our country produces goods and exports it, then we can call ourselves self-sufficient, but when we are always importing goods and not exporting, a point comes where the government must lend money. When the government lends money, the interest rates changes because the RBI must repay the amount with interest and this interest comes on every citizen’s head in the form of interest on loans. This is how the fiscal deficit affects interest rates. Higher the fiscal deficit, higher the interest rates.
Inflation: To understand how inflation affects the interest rates, it is important to understand the difference between the nominal interest rates and real interest rates. Nominal interest rate is interest offered by the local bank or other lenders. On the other hand, the real interest rate is the corrected difference of inflation on the nominal interest rate. It was proposed by Irving Fisher and is proved by the equation r = i – π
r = real interest rate
i = nominal interest rate
π = inflation
When the inflation surpasses the optimum mark, then the RBI manipulates the real interest rates to keep the inflation down. The increasing inflation cost is added to the real interest, and that’s how the interest rates get affected by inflation. In any country, it is crucial to keep inflation down else it’ll get difficult for many people to meet daily expenses. Hence, the higher the inflation, the higher the interest rates and vice-versa.
Global interest rates & foreign exchange rates: After the year 1991, India became a part of global trade, meaning it became an open economy. This means we were open to world trade. This at one point opened many doors for business but also enabled us to be a part of changing global interest rates. This means the country’s interest rates must be obedient with the changing global trends in interest rates.
Reserve Bank of India: RBI constantly keeps tweaking in the monetary policy to control inflation. When the RBI is trying to control the inflation, it means the interest rates go up. It is in the RBI’s hand to make the final decision in the benefit of the entire nation.
This is how involuntary factors affect interest rates. Now let’s learn about the voluntary factors.
When you borrow money from a lender, whether you gage any collateral is secondary, but the risk to the lender is primary because it's his money that’s at play. The lenders try to keep the risk minimum and hence they are constantly looking for creditworthy people. Being creditworthy not only gets you a loan faster but also enables you to enjoy low-interest rates. Below are the ways by which you can enjoy low-interest rates or even 0% on interest.
Credit score: To best enjoy low-interest rates starting by improving the credit score can do miracles in life. The credit score speaks volumes about you. It tells things like how you are at paying your EMIs, managing your debt and holding credits. You can improve your credit score by doing simple things like being punctual about the loan EMIs and not taking parallel loans.
Loan EMI and duration: It’s a calculated fact that availing a loan for a shorter tenure means saving large sum on interest. When you choose a loan with small EMIs, and for a long duration, you are paying more in interest. So, availing a loan for a shorter tenure will save your money, but at the same time, you need to pay bigger EMIs. For some people, it is a difficulty, but they can choose a suitable tenure to reduce the cost of interest.
Collateral: People who gage collateral enjoys low interest because by pledging collateral you’re reducing the lender’s risk. Therefore, the lender can make a low-interest rate offer to you. Make sure you have collateral if you want to enjoy the benefits of low-interest rates.
So, this is how the interest rates are decided. Many factors are at play, some are in our hands and some aren’t. The factors that are in our hands can be worked and improved. So, work your credit report and enjoy low-interest rates.