Personal Loan: 5 macroeconomic factors that affect your interest rates

Before getting a personal loan, various factors such as credit history, banks, income, and employment type, among many other factors, may determine interest on your loan. These factors are directly related to the borrowers and lenders. 

However, there are certain factors beyond the control of a borrower and a lender that may have an impact on personal loan interest rates. One such category of indicators affecting interest rates is macroeconomic indicators. These factors are a clear reflection of how a change in the economy can have a direct impact on you through personal loans.

What are macroeconomic factors?

Macroeconomic factors are indicators that reflect the overall state of the economy. They include factors such as fiscal policy, inflation, monetary policy, etc.

Macroeconomic factors that affect personal loans are:

Repo rate

It is the rate at which the Reserve Bank of India (RBI) lends money to commercials. Any change in the repo rate may have an impact on the interest rate offered on personal loans. If the central bank increases the repo rate, banks may increase the interest rate on loans. When the RBI increases the repo rate, banks, in turn, increase the rate at which they offer loans. This will also increase the interest on personal loans, making it costlier.

If the central bank reduces the repo rate, banks will generally lower interest rates on loans. The difference between the repo rate and the interest rate of personal loans is the income for banks. However, it is not always necessary for banks to change interest rates according to changes in repo rates.

Inflation

Inflation is the rise in prices of goods and services in the economy. When inflation rises in the economy, the RBI increases the repo rate to control inflation. An increase in interest rates is expected to discourage spending and borrowing in the economy, thus controlling inflation. In such a case, banks may raise interest rates according to the repo rate. This will make your personal loan costlier. However, if the central bank decides to encourage spending and borrowing in the economy due to low inflation, the interest rate on personal loans will reduce, too.

Fiscal policy

Fiscal policy reflects the government’s expenditures and revenues. When the government tries to spend more, it raises taxes or borrows from the market to fund its expenses. In the case of borrowing from the market, the interest rate rises for private borrowers as the demand for credit increases due to rising borrowing by the government. Therefore, interest rates rise for both government and private borrowers.

However, if the government reduces spending, it borrows less from the market, hence lowering the interest rates in the market. This lowers interest rates on personal loans, making it cheaper.

Global factors

Due to globalisation and interconnectedness among various economies, any changes in the economic conditions and interest rates around the globe, especially in the United States, will have an impact on the Indian economy. The central bank will adjust the interest rates accordingly, which eventually leads to changes in interest rates offered by banks on personal loans. This can either make your personal loan expensive or cheaper.

Condition of the Indian economy

The state of the economy also has an impact on personal loan interest rates. If the economy is growing, it is expected that people will spend and borrow more. Seeing this demand, banks can raise interest rates on personal loans, making them costlier for consumers. However, during an economic slowdown, people spend less and tend to borrow less. In order to boost demand for borrowing, banks may lower interest rates, encouraging people to take loans. This will lead to lower interest rates on personal loans, making them cheaper.

The interest rates of personal loans are impacted by several macroeconomic factors such as repo rate, inflation, state of economy etc. Therefore it becomes essential to track certain metrics to check the impact of such factors on personal loan interest rates.

1. Check economic data: The government releases data on GDP, inflation and other economic data. Any significant change in such data may have an impact on your personal loan interest rates.
2. RBI MPC meet: The Monetary Policy Committee (MPC) meets four times a year to decide and announce changes in repo rates. Tracking MPC will help to know any changes in interest rates, which may further be reflected in personal loan interest rates.
3. Government policies: Check various government policies to know if it is spending more or less. Any change in the fiscal policy may have an impact on personal loan interest rates.

In conclusion, apart from keeping track of lenders, interest rates, credit scores, etc., it becomes important to track macroeconomic factors to determine their impact on the interest rates of personal loans. This would help you get a rough estimate of personal loan interest rates charged by banks, hence helping you to make a smarter choice.