Secured Business Loan Interest Rates: Factors That Affect Your EMI

 


In India, secured business loans are a commonly preferred option among small and medium enterprises for financing. Such loans help businesses to get funds for their business requirements like expansion, buying machinery, working capital, and other operations. A significant factor in planning for a loan is knowing how the interest rates and the various factors impact your EMI (Equated Monthly Instalment).

What Are Secured Business Loans?

A secured business loan is classified as a guaranteed loan, which is supported by the collateral. Such secured loans are often regarded as lower risk by the lenders as they have the collateral backing and, thus, the security.

In recent years, secured business loans online have been introduced by lenders as a means of making the whole process easy and enabling borrowers to carry out everything including application, document submission and even approval without having to go back and forth to the bank branch.

Understanding Interest Rates and EMI

Before looking into the elements that influence interest rates, it is important to know what interest rates and EMIs are:

●     Interest Rate: This represents the cost for borrowing funds. It is shown as a fraction of the total loan amount. Typically, lower interest rates lead to lower monthly payments.

●     EMI (Equated Monthly Instalment): It is the monthly payment to the lender. The EMI consists of two parts: the loan principal and the interest.

The rate of interest that the lender gives you on a loan is a critical factor that determines the EMI amount that you will pay. If the interest rate is high, the EMI will also be high. In case of a lower interest rate, the EMI would be lower.

Main Factors That Affect Interest Rates on Secured Business Loans and EMI

The secured business loan interest rate and your EMI, in turn, are determined by the following factors:

  1. Credit Score

Among the various factors that determine your interest rate is your credit score. A good credit score indicates the borrower's good repayment history and financial discipline, and this often leads to lower interest rates. On the contrary, if you have a low credit score the lenders may impose a higher interest rate.

  1. Type and Value of Collateral

Because secured business loans are asset-backed, the kind of collateral and its worth are very important. If the collateral’s value is high, the lenders will give you more value and might present better terms.

  1. Loan Amount and Repayment Tenure

The total amount of the loan and the duration of the repayment period also influence the rates of interest and the EMIs:

-       Selecting a longer period of repayment will lower your EMI, however, it is likely that you will pay more interest in total over the entire duration of the loan.

-       On the contrary, choosing a shorter repayment tenure will result in a higher EMI but ultimately will lead to less interest paid.

  1. Business Financial Health

A lender will review your business’s financial statements, revenue history, and cash flow. If your business displays consistent income and good financial condition, then lenders might offer lower interest rates due to the lower probability of default. On the other hand, irregular income or poor financial condition will most likely lead to the increase in interest rates.

  1. Market Conditions and Bank Policies

Interest rates also depend on broader economic conditions. Lenders generally follow and modify their interest rates when the central bank (Reserve Bank of India) alters the policy rates. The impact of these changes also extends to secured business loans online, as a good number of lenders employ digital pricing models that are very responsive to market fluctuations.

  1. Relationship With the Lender

You might be offered lower interest rates if you have a good relationship with a bank or a lender. Lenders appreciate these long-term relationships as they give them a better understanding of your financial habits.


ORIGINAL CONTENT:- Secured Business Loan Interest Rates: Factors That Affect Your EMI


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