A ‘loan’ always comes at a price in the form of interest. While interest payment is an additional burden that none of us are happy to bear, we all recognize the importance of it as an incentive for lenders and the system has thus survived over thousands of years.

Institutional lenders like banks have a rigid interest policy that allows little scope of bargaining. In this era of marketing blitz for lending, many of us are often swayed away by the promises of ‘best interest rates’ or ‘fastest loan disbursal’ promises. Let us first put the importance of interest rates in its context.

Thus, for every borrower who has a fair estimate of the amount of loan required and the tenure for which they want them, even a difference in 0.5% in the final interest rate makes a big difference in the long run.A difference in 0.5% interest rate boils down to just an ‘extra’ payment of Rs.23 per month in the above example, a seemingly small price to pay for some other benefits like faster disbursal, but it does add up to a difference of Rs.280 (approx) by the end of the year. If the tenure is extended to 24 months, the monthly difference remains same but annually, the difference is Rs.554.64.

Interest rates are a big issue for borrowers when it comes to personal loans. Without a conventional collateral or mortgage as in the case of a home loan or car loan, personal loans understandably draw much higher interest rates from conventional lenders like banks. Current rates of personal loans vary from 14-20% across most scheduled commercial banks. The irony is that the rich get loans at a much lower rate than the poor, even though the likelihood of requiring a loan may well be reverse. Thus, getting a loan approval may well be the biggest hurdle for getting a personal loan for the needy with higher interest rates being an additional burden to bear.

A dangerous but extremely popular tool in today’s world is a credit card. Many of us use this easy and convenient form of ‘plastic money’ as a card ensures we do not need ‘approval’ for personal loans. But a seemingly harmless 1.75% monthly interest rate that the credit card charges is actually 21% interest rate annually, while 3.4% monthly interest rate actually translates into 40.8% interest rate annually. The numbers are extremely high by any standards. In such a scenario, alternatives like P2P lending can offer a more beneficial interest rate. A portal that allows direct interaction between a borrower and a lender without a third party intermediary trying to earn interest incomes not only offers best deal for the borrower, but also promises maximum returns for the lender as well.