On What Factors Commercial Loan Interest Rate Depends

Commercial Loan

When it comes to a commercial loan or business loan, these are essential for getting your business in shape. However, the commercial loan interest rates are majorly influenced by multiple factors. These include the following:

  • Inflation Rate- The rate of inflation will lead to prices going up for all services and products although currency values will go down along with overall purchasing power. Decline in currency value leads to an increase in interest rate of commercial loans. Lenders will give credit at higher interest rates in case inflation rates are high.
  • Current Monetary Policy- The present monetary policy of the RBI (Reserve Bank of India) also influences commercial/business loan interest rates. New policies are periodically announced by the central bank for ensuring smooth liquidity maintenance and controlling rates of inflation. RBI may relax the policy by enhancing liquidity and this leads to interest rates going down. However, they increase each time the RBI keeps the rates absolutely similar.
  • Credit demand & supply- The commercial loan interest rate is also affected by demand and supply of credit. When the former goes up, higher rates are charged by lenders. However, the rates are reduced when credit supply surpasses overall demand.
  • Type of Loan being applied- Both Indian banks and NBFCs offer secured and unsecured loans while borrowers have to keep assets as collateral for getting the former type of business loan. Lower interest rates are charged on secured business loans while they are higher for unsecured business loans.
  • Personal Credit Score of Borrower- Lenders make use of the credit history and CIBIL score of the borrower in order to evaluate overall creditworthiness. Loan sanctioning takes place on the basis of the applicant’s personal credit score as well. A higher credit score may help in getting loans at lower interest rates and vice versa.
  • Business Type- Credit based risks are often assessed by financial institutions based on the business type. Some businesses are taken to be riskier propositions as compared to several others. Higher interest rates may be charged in case of businesses perceived as risky or volatile by lenders.
  • Overall Experience- The experience of the borrower/applicant and the organization may also influence the commercial loan interest rate. Several lenders offer loans for business inception or even expansion. Higher interest rates are charged for start-ups on account of higher chances of defaults. However, loans are given at a lower interest rate for expanding a business.
  • Turnover- The commercial loan amount is often determined on the basis of the turnover of the company in question. Interest rates are determined through comparison of the revenue generated by an organization with the business loan amount. Higher turnover indicates a strong financial position of the borrower and hence he/she can negotiate for a lower rate of interest. High turnover also enables applicants to apply for higher credit and get flexible repayment choices too.

These are some of the key factors that influence commercial loan. If you are looking for business loans up to Rs. 30 lakh at comparatively reasonable rates of interest, you can choose Bajaj Finserv as your lender. You can avail of the loan by submitting only 2 documents.

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