Loan Tips: Low Interest Rate vs. Low Interest Spread – What Should You Focus On?
When taking out a loan—whether a home loan, personal loan, or car loan—most people immediately look at the interest rate. A lower rate seems attractive, but there’s more to consider. Banks usually display the interest rate, but there’s often a hidden component called the interest spread, which can impact the overall cost of your loan.1. What Is Interest Rate?The interest rate is the percentage of the principal amount that you pay as interest over a period of time.Example: On a ₹10 lakh home loan at 8% interest, you pay ₹80,000 per year as interest.2. What Is Interest Spread?The interest spread is the difference between the bank’s cost of funds (what it pays to borrow money) and the rate it charges you.A lower interest spread can sometimes be more important than a slightly lower interest rate because it reflects the real cost of the loan.3. Why Interest Spread MattersBanks often advertise attractive rates but add a higher spread, increasing the effective interest you pay.Over the entire loan tenure, even a 0.25–0.5% higher spread can add thousands of rupees to your repayment.4. Which Is Smarter to Look At?Compare both interest rate and interest spread.If two loans have similar interest rates, choose the one with the lower spread, as it reduces hidden costs.Check processing fees, prepayment charges, and other hidden fees too, as they can offset a low rate.5. Pro Tips for BorrowersAlways ask the bank for the spread along with the interest rate.Use loan EMI calculators to compare the total cost, not just the monthly payment.Consider floating vs. fixed rates—floating rates may have a lower spread but can vary with market conditions.Bottom Line: While a low interest rate grabs attention, the interest spread often determines the real cost of your loan. Savvy borrowers focus on both to make a financially smarter choice. Disclaimer:The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any agency, organization, employer, or company. All information provided is for general informational purposes only. While every effort has been made to ensure accuracy, we make no representations or warranties of any kind, express or implied, about the completeness, reliability, or suitability of the information contained herein. Readers are advised to verify facts and seek professional advice where necessary. Any reliance placed on such information is strictly at the reader’s own risk.