Introduction

As of 2025, the personal loan market is undergoing turbulence amid rising interest rates, altering the borrowing landscape. Personal loans are frequently the flexible option for financing costly events such as weddings, addressing unexpected medical expenses, or debt, because they are typically not secured by collateral. However, as personal loan interest rates in India rise, repaying the loan is increasingly burdensome for borrowers . This article discusses the impact of rising interest rates on borrowers, examines some of the macroeconomic context, and explores strategies for managing loans on a high-cost basis.

Why Has the Interest Rate Increased?

The Reserve Bank of India (RBI) informs the cost of borrowing by its repo rate, or the rate it lends to banks. In 2025, inflation will increase prices as global supply chain constraints and domestic demand increase. Therefore, the RBI is being careful with rate cuts, and they will take a further hike into consideration if inflation remains a concern. As of early 2025, the RBI kept the repo rate at 6.50% due to continuing inflation risks. The potential for any cuts to rates will depend on the trend of inflation moderating. Expectedly, these decisions from the RBI will impact the Indian personal loan interest rate. The interest rate for a personal loan can typically range between 10.75% and 25%, depending on a borrower’s credit profile and lender policy.

Banks such as HDFC (11%–24%), ICICI (10.9%–17%), and Axis (11.25%–22%) have already raised rates because of funding costs. A rise in personal loan rates means bigger EMIS on your weekly or monthly spending plan, particularly for middle-class households that are likely to take personal loans to finance large purchases.

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Effects for Borrowers

In the context of rising interest rates in India, a change of (say) 1% could make a difference in repayment. Take the example of a personal loan of ₹5 lakh for 5 years. If you were to take this loan at 12%  interest rates, and then the next day it were to go to 13%, now the EMIs would go from ₹12663 to approximately ₹13263; about a ₹600 increase or ₹36,000 on top of the interest paid. So, for borrowers with a less than 750 credit rating, they would be at a higher rate so you probably would never see a personal loan below 20%.

Reduced Loan Eligibility

For loan eligibility assessment, lenders will evaluate debt-to-income ratios, which assess the borrower's capacity to honour the repayments. When the interest rates increase, you typically have a larger EMI, so the amount the borrower can borrow is reduced, resulting in a decrease in loan eligibility. If you are a salaried individual with a monthly income of ₹50,000, this could be a drop of 10%–15% on rates continually increasing, thus they would be limited in their financial capacity.

Debt Trap Risks

Personal loans are unsecured, so individuals do not need to provide collateral to secure the loan. However, the impact of defaults can be severe and even devastating; a default will destroy a borrower's credit score. Higher rates also increase the chance of missed payments, especially for consumers with multiple loans. Thus, by 2025, when living costs will be substantially higher, these factors can lead to over-leveraging and a debt trap if borrowers are not careful.

Shift in Borrowing Attitude

As the interest rates on personal loans in India rise, many borrowers are reconsidering how they borrow money. Some borrowers take short loan tenures, so there is less interest expense. Others are exploring alternatives like gold loans or top-up loans, which typically have less interest expense. Digital platforms that provide comparisons are gaining momentum as they allow borrowers to find competitive opportunities.

Economic and Industry Outlook

The Indian outlook in 2025 is mixed. Although GDP growth remains solid at 6.8% in 2025 (IMF estimates), inflation pressures affect disposable incomes, especially fuel and food prices. The RBI is targeting inflationary issues and pursuing rate hikes, which means personal loan interest rates remain high in India. However, many digital platforms that offer loans are also investing in technology, such as AI, that seeks to automate, bypassing traditional methods for assessing and approving loans. And, while some markets fall into predatory lending, stricter regulations remain in force, requiring checks for creditworthiness.

Conclusion

India's rise in personal loan rates shows the economy faces its fair share of challenges. However, when the economy changes, borrowers and their credit health must remain in control when selecting personal loans. Great scrutiny is encouraged to identify options and choose a lender whose terms align with your repayment capacity. As digital lending continues to evolve, using EMI calculators and interest rate comparisons will continue to allow consumers to control the process. By continuing to educate themselves on personal loans, Indian borrowers should be able to manage them efficiently when interest rates rise.

Disclaimer: Speak to a certified financial advisor about all personal loans to help identify if a personal loan will support your financial goals.

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