Various kinds of loans interest

Interest rates differ for various kinds of loans on account of following reasons:-

1. Difference in the nature of credit market:- Rates of interest differ on account of the difference in the nature of te credit market. For example credit market is unorganized in rural areas therefore, money lenders charge higher rates of interest. But in urban areas credit market is well organized in rural under rule and regulation of the government. Therefore, rates of interest become reasonable. Banks are the main institutions for the lenders of loans. They charge that rate of interest which is determined as per rules from time to time.

2. Difference of the risk of loans:- Rates of interest differ according to the difference of the risk of loan. If more risk is involved, rates of interest become high. On the other hand they become low when risk becomes low.

3. Difference of the purpose of loan:- If loan are taken for the purpose of production, rates of interest become low. On the other hand if loans are taken for the purpose of consumption, rates of interest become high. But rates of interest become the highest when loan are taken for harmful activities like gambling, litigation etc.

4. Security of loans:- Rates of interest differ because of the difference in security of loans. When proper security of loan is given, rates of interest become low. But in absence of the proper security, rates of interest become high.

5. Period for the repayment of loan:- There is difference in rates of interest on account of the difference in the period for the repayment of loans is higher than that of short period loans.

6. Demand for the supply of loan:- Rates of interest differ according to the difference of demand for supply of loans. When demand for loans is higher than supply of loans. When demand for loans, rates of interest become high and vice-versa.

7. Economic condition of the borrower:- There is difference in rates of interest in the economic condition of borrower. If economic condition of the borrower is sound loans are advanced at low rate of interest. On the other hand rate of interest become high if economic condition of borrower is weak.