Want to know lender charge right interest?


#1

I have business and applied loan, I want to know my lender charging right one.


#2

Remember the factors mentioned below when thinking about the interest rate.

  1. Nature of the lender: Since risk is high for the lender, interest rates also increase accordingly. You can go for a more formal way of borrowing money and reduce your interest expense by doing some paperwork. The interest rates charged by banks and NBFCs range between 13% and 21% depending on the tenure and the loan amount.

  2. Loan amount: The interest rate is charged on the principal. A higher amount attracts a higher interest expense. A business cannot modify the loan amount to a great extent once the purpose is decided. However, the interest rate can be charged differently. You can negotiate in order to reduce your interest expense.

  3. Type of loan: The nature of the facility also impacts the interest rate, which varies depending on the purpose of the loan (for example, working capital loan or loan for an asset).
    Comparing and contrasting different lenders and their offers can help you select the one which helps you minimize your interest expense.

  4. Business Financials: An important factor that determines your bargaining power on the interest rate of your business loan is the financial status of your business. The first thing is to have an organized structure or system in place for handling the finances.

  5. Duration of the loan: If the period is longer, it is possible to negotiate for a slightly lower interest rate.

  6. Structure of repayment: Today, there are different repayment structures for loans. Once the principal repayment begins, the interest can be calculated based on the diminishing balance method (on the principal amount outstanding). In this structure, the interest expense might be on the higher side, but it also gives you more flexibility of funds. A structure that is in contrast to the previous one is repayment of principal as early as possible. There are various permutations and combinations of interest and principal payments, which can change the interest expense as well as the time of payment.

  7. Collateral: Collateral is an asset or a guarantee given as a security for a loan. This will be seized in case of failure to repay the loan. The stronger the collateral, the more bargaining power you have with respect to the interest rate.

  8. Credit score: An individual’s credit score is a reflection of the credibility of the person in terms of repaying a loan on time.The better (or higher) the credit score, the lower the interest rate.

  9. Business details: Apart from the financial situation, a lender always considers certain non-financial factors like; the number of years of operation, professional expertise, compliance with regulations to assess the soundness of the business. Since these factors are considered to be high-risk if they are unfavorable, a much higher business loan interest rate can be charged.

  10. Additional expenses: Over and above the business loan interest rate, the small business might also need to pay the following charges: processing Fee, stamp duty and other statutory charges, commitment fees, and foreclosure charges (small businesses might opt to repay the loans before the determined tenure, whenever they have surplus cash flow).