How Loan Interest Rates Are Calculated in India: Personal, Home, Business Loans & More

Two people can apply for the same personal loan, from the same bank, on the same day — and walk away with interest rates several percentage points apart. That gap isn't random. Every lender builds your rate from the same few ingredients: a benchmark rate, a spread for your risk profile, and the features of the loan itself.

This guide explains how interest rates are calculated on the most common loans in India — personal loans, home loans, business loans, loan against property (home equity loans), working capital, car loans, gold loans and loans against shares — and what you can do to bring your rate down.

The basic formula: benchmark + spread

Almost every loan rate in India works like this:

Your interest rate = Benchmark rate + Spread

• Benchmark rate — the base the lender starts from. It moves with RBI policy and market conditions, and it's the same for every borrower at that lender.
• Spread (also called margin or risk premium) — the extra the lender adds for you. It depends on your credit score, income, the loan type, whether the loan is secured, and the lender's own costs.

The benchmarks you'll come across

Benchmark	What it is	Where it's used
Repo rate / EBLR	The repo rate is the rate at which the RBI lends to banks. Loans linked to an External Benchmark Lending Rate (EBLR, also called RLLR) move with it.	Since 1 October 2019, banks must link new floating-rate retail loans (home, car, personal) and floating-rate loans to micro and small enterprises to an external benchmark. Most banks use the repo rate.
MCLR	Marginal Cost of Funds based Lending Rate — built from the bank's own cost of funds.	Floating-rate loans taken between April 2016 and October 2019, and many larger business loans.
Base rate / BPLR	Older internal benchmarks.	Loans taken before April 2016. Worth reviewing if you still have one.
Lender's own reference rate	NBFCs and housing finance companies set their own benchmark.	Most NBFC loans.

Why this matters: RBI rate changes reach external-benchmark loans faster. Banks must reset EBLR-linked rates at least once every three months, while MCLR-linked loans usually reset only every 6 or 12 months.

What decides your spread

The benchmark is out of your control. The spread isn't. Lenders look at:

1. Credit score (CIBIL and others). The single biggest lever. A score of 750+ generally unlocks the best rates; below 650, you may be offered a much higher rate or declined. See our Credit Report guide.
2. Income and stability. Salaried employees at well-known companies, and businesses with a steady record of filed ITRs and GST returns, are priced lower.
3. Existing EMIs. If current EMIs already take a large share of your monthly income (your FOIR), lenders see higher risk.
4. Secured or unsecured. A loan backed by property, gold, shares or a vehicle is far less risky for the lender, so it's cheaper.
5. Loan amount and tenure. Larger loans can get finer pricing, though longer tenures increase the total interest you pay.
6. Your relationship with the lender. Existing customers with a salary account or a clean repayment track record often get a better offer.

How interest rates compare across loan types

The comparison below shows how loan types are generally priced relative to each other. It isn't a list of current offers — actual rates change with RBI policy and vary widely between lenders and borrowers.

Loan type	Secured?	Relative rate	Main pricing factors
Home loan	Yes — the property	Lowest	Credit score, loan-to-value, salaried or self-employed
Loan against property (home equity loan)	Yes — residential or commercial property	Low to moderate	Property type, loan-to-value, business vintage
Loan against shares / mutual funds	Yes — securities	Low to moderate	Type and volatility of securities pledged
Gold loan	Yes — gold	Low to moderate	Purity and value of gold, tenure
Car loan	Yes — the vehicle	Low to moderate	New or used car, credit score
Working capital (cash credit / overdraft)	Usually — stock, receivables or property	Moderate	Turnover, GST and ITR record, collateral
Business loan (unsecured)	No	Moderate to high	Business vintage, turnover, profitability, credit score
Personal loan	No	Moderate to high	Credit score, employer, income, existing EMIs

Personal loan interest rates

A personal loan is unsecured — there's no collateral to fall back on — so your credit profile does all the work. Salaried applicants with high credit scores at reputed employers get the lowest personal loan interest rates; self-employed applicants and people with short credit histories usually pay more. Most bank personal loans are fixed-rate, so the EMI stays the same for the whole tenure. Explore Personal Loans.

Home loan interest rates

At banks, home loans are usually floating-rate and linked to the repo rate. Because the loan is secured by the property and tenures run to 20–30 years, home loans carry some of the lowest rates available. Your credit score, the loan-to-value ratio and your employment type all affect pricing. Small rate differences matter enormously over a long tenure — see the example further down. Explore Home Loans.

Loan against property (home equity loans)

A loan against property (LAP) lets you borrow against the market value of a home or commercial property you own — India's equivalent of a home equity loan. Lenders typically lend around half to two-thirds of the property's value. Because it's secured, a LAP is usually much cheaper than an unsecured business or personal loan, which makes it a popular way for MSME owners to fund expansion. Residential property generally gets better terms than commercial property. Explore Loan Against Property.

Loan against shares and mutual funds

You can pledge listed shares, mutual funds or bonds to borrow without selling your investments. How much you can borrow depends on the security — lenders lend a smaller share of the value against volatile equity shares than against debt funds. Many of these facilities work like an overdraft, so you pay interest only on the amount you use.

Business loan interest rates

Unsecured business loans are priced on business vintage, annual turnover, profitability, banking behaviour and the promoter's credit score. Businesses with three or more years of filed ITRs and GST returns get noticeably better rates. Offering collateral can bring the rate down, and a loan covered under the government's CGTMSE guarantee scheme can make collateral-free credit easier to get. Explore Business Loans.

Working capital loans: interest only on what you use

Cash credit and overdraft facilities work differently from term loans. You get a sanctioned limit, but interest is calculated on your daily outstanding balance — only on what you've actually drawn.

Example: a ₹10 lakh overdraft limit at 11% a year. If you use ₹4 lakh for 30 days, the interest is about ₹3,616 — not the ₹9,041 you'd pay if the full ₹10 lakh were drawn. Explore Working Capital Loans.

Car loans and gold loans

• Car loans are secured by the vehicle. New cars get lower rates than used cars, and some lenders — especially dealer finance and NBFCs — quote a flat rate. Read the next section before comparing offers.
• Gold loans are secured by gold jewellery, and the rate depends on purity, value and tenure. They're quick to get and depend less on your credit score, but if you miss payments the lender can eventually auction the pledged gold.

Flat rate vs reducing balance rate: the comparison that matters most

This is where many borrowers get caught out.

• Reducing balance rate: interest is charged on the outstanding principal, which falls with every EMI. This is the standard for bank loans.
• Flat rate: interest is charged on the original loan amount for the entire tenure, even though you're repaying it every month.

Example — ₹5 lakh borrowed for 3 years:

	12% reducing balance	12% flat
Monthly EMI	₹16,607	₹18,889
Total interest	₹97,858	₹1,80,000
Effective annual rate	12%	about 21.2%

A "12% flat" loan costs about the same as a 21% reducing-balance loan. Always ask which method the lender uses.

How your EMI is calculated

For reducing-balance loans, the EMI formula is:

EMI = P × r × (1 + r)ⁿ ÷ [(1 + r)ⁿ − 1]

• P = loan amount (principal)
• r = monthly interest rate (annual rate ÷ 12 ÷ 100)
• n = number of monthly instalments

Example — ₹5 lakh personal loan for 3 years:

Interest rate	Monthly EMI	Total interest paid
11%	₹16,369	₹89,297
12%	₹16,607	₹97,858
14%	₹17,089	₹1,15,197
16%	₹17,579	₹1,32,827

Each extra 2 percentage points adds roughly ₹17,000–18,000 in interest on this loan.

Example — ₹50 lakh home loan for 20 years:

Interest rate	Monthly EMI	Total interest paid
8.5%	₹43,391	₹54,13,879
9.0%	₹44,986	₹57,96,711

Half a percentage point adds ₹1,595 to the EMI — and ₹3,82,832 in interest over 20 years.

Try your own numbers with our EMI Calculator.

Fees change the real cost: compare the APR

The interest rate isn't the whole cost. Processing fees, documentation charges and insurance bundled into the loan all add up. The Annual Percentage Rate (APR) includes them.

Example: a ₹5 lakh, 3-year personal loan at 12% with a 2% processing fee (₹10,000 deducted upfront) has an APR of about 13.4%.

RBI requires banks and NBFCs to give you a Key Fact Statement (KFS) for retail and MSME loans before you sign, showing the APR and all charges. Compare loans on APR, not the headline rate.

Fixed or floating?

	Fixed rate	Floating rate
EMI	Stays the same	Changes when the benchmark resets
Suits you when	You want certainty, or rates look set to rise	The loan is long, or rates look set to fall
Prepayment	Charges may apply — check your loan agreement	Individual borrowers generally pay no foreclosure charges
Common for	Personal loans, car loans	Home loans, LAP, working capital

7 ways to get a lower interest rate

1. Raise your credit score before you apply. Pay every EMI and card bill on time, and keep card usage below 30% of your limit.
2. Don't apply to many lenders at once. Several loan enquiries in a short period can lower your score.
3. Offer collateral if you can. Moving from an unsecured business loan to a loan against property can cut the rate substantially.
4. Reduce your existing EMIs. Closing small loans first improves your FOIR and your offer.
5. Add a co-applicant with a strong income on home loans and LAP.
6. Negotiate, and compare on APR. Ask for fee waivers and put the Key Fact Statements side by side.
7. Review older loans. If you're still on MCLR or base rate, ask your bank about switching to an external-benchmark rate, or consider a balance transfer — after weighing the switching costs.

Know where you stand before you apply

It helps to know how a lender is likely to see you before you apply:

• Loan Readiness Check — see your chances of approval and a personalised plan to improve them.
• Free Financial Health Check — for businesses: check profitability, liquidity and debt ratios.
• Eligibility Check — estimate how much you can borrow.

Looking for the right loan at the right rate? Talk to our team — we work with a wide network of banks and NBFCs.

---

This article is for general information only. It isn't financial advice or a loan offer. Interest rates, fees and RBI rules change over time, so check the latest terms with your lender before borrowing. Worked examples are illustrative and rounded to the nearest rupee.