Understanding Loan Interest Rates In Nigeria: 2025 Guide

Do you want to learn about loan interest rates in Nigeria? we have everything covered in this article.

Lending rates are the interest rates banks charge for short and medium-term loans to businesses and individuals. These rates depend on the borrower’s creditworthiness and the loan’s purpose. Since terms and conditions differ across countries, comparing these rates globally is difficult. Generally, higher lending rates lead to more non-performing loans and indicate poorer asset quality.

When seeking a loan, it’s important to understand interest rates. The nominal interest rate (NIR) is the introductory rate banks advertise, not considering inflation or compounding. The effective interest rate includes compounding, showing the actual cost of borrowing.

The gap between nominal and effective rates widens with more frequent compounding. The Annual Percentage Rate (APR) combines yearly interest and fees, which can be nominal or effective. Loans with frequent compounding or high fees have a higher APR, making them more expensive.

Commercial banks usually offer rates between 12% and 22%. Online lenders offer rates from 10% to 30%, often giving better deals to those with good credit. Microfinance banks typically have lower rates, from 5% to 15%, and peer-to-peer lending platforms offer rates between 10% and 20%. Credit Nigeria helps users compare loan offers and interest rates from multiple lenders with one application, making it easier to find the best loan.

9 Factors That Influence Your Interest Rates

Credit Score:

Your credit score plays a crucial role in loan approval. The credit bureau provides your credit score, which reflects your loan repayment history. Late or missed payments are reported to the credit bureau to lower your score, making you seem risky to lenders and resulting in higher interest rates for future loans. Pay your loans on time or extend your payment period to maintain a good score. Paying off loans early also has its perks.

Income:

A higher income shows lenders that you can repay the loan on time. This can help you get a larger loan and a lower interest rate.

Existing Lending and Banking Relationships:

Your past behavior with loans influences your loan conditions. If you consistently repay on time, you can borrow more significant amounts and get better interest rates. The same goes for banking apps—regularly using their services can improve the loan amounts and interest rates they offer you.

Lender’s Risk Tolerance:

Lenders have different levels of risk tolerance, which affects their interest rates. Those willing to take on more risk charge higher rates, especially for borrowers who might not qualify with more cautious lenders. Generally, commercial banks charge higher rates than microfinance banks and peer-to-peer platforms. Online lenders’ rates can vary widely and are sometimes the highest.

Loan Amount:

More substantial loan amounts typically have lower interest rates, while smaller loans have higher rates. This is because the risk is spread over a more significant sum. Loan size is an essential factor in determining the interest rate.

Repayment Term:

The length of the loan repayment term also affects the interest rate. Longer terms usually come with higher rates, while shorter terms have lower rates.

Collateral:

Loans secured with collateral, such as property, usually have lower interest rates. The lender’s risk is reduced, as they can take the collateral if the borrower defaults.

Monetary Policy Rate (MPR):

The Central Bank of Nigeria (CBN) influences lending rates through the Monetary Policy Rate, which is currently 15.5%—an increase in the MPR results in higher loan interest rates.

Economic State:

The overall economic conditions affect lending rates. For example, higher inflation leads to an increase in the MPR, which raises interest rates.

Different Lenders Interest Rates in Nigeria

1. Commercial Banks:

Rates range from 12% to 22%. These banks require proof of income, good credit scores, and sometimes collateral.

2. Online Lenders:

Rates range from 10% to 30%. They often offer lower rates to borrowers with good credit scores. It’s essential to compare offers to avoid hidden fees and unfavorable terms.

3. Microfinance Banks:

Rates range from 5% to 15%. These loans can be used for various purposes, such as business expansion, education, and emergencies. Repayment terms are usually shorter and with stricter conditions.

4. Peer-to-Peer Platforms:

Rates range from 10% to 20%. This option is helpful for those who need help accessing traditional bank loans or have low credit scores.

Types of Interest Rates

Nominal Interest Rate (NIR)

The nominal interest rate is the introductory rate often displayed in loan advertisements and financial institution profiles. It doesn’t take inflation or compounding into account. When these factors are included, the interest you pay can increase significantly. Compounding means adding the interest earned to the principal, resulting in higher total interest payments.

Effective Interest Rate

The effective interest rate considers compounding, making it a more accurate reflection of the actual cost of borrowing. Also known as the market rate of interest, yield to maturity, or annual percentage yield (APY), the effective rate increases with more frequent compounding periods. For example, suppose one lender compounds interest every six months and another compound annually at an 8% nominal rate. In that case, the semi-annual compounding leads to a higher effective rate, making the loan more expensive.

Annual Percentage Rate (APR)

The APR is the annual cost of borrowing, including any fees. It can be either nominal or effective. Nominal APR is the base rate without considering compounding. At the same time, effective APR includes the effects of compounding, giving a clearer picture of the total cost of the loan over a year.

Frequently Asked Question

How is interest calculated on a loan in Nigeria?

To calculate the simple interest on a ₦15,000 loan at a 4% interest rate for two years, use the formula: SI = ₦15,000 × 4 × 2 / 100. This equals ₦1,200.

How do you explain the interest rate on a loan?

An interest rate is what you pay to the lender for borrowing money. It’s an extra cost added to your loan amount. The higher the interest rate, the more you’ll end up paying throughout the life of your loan.

What is the normal interest rate on a loan?

The interest rates for personal loans can vary between 9.99% per annum and 44% per annum.

What’s a good loan rate?

The ideal personal loan interest rate depends on your credit score:

If your credit score is 740 or above, you can aim for an interest rate below 8%. Look for loans tailored for excellent credit.
For a credit score between 670 and 739, expect an interest rate of around 14%. Look for loans designed for good credit.

Which type of loan is best?

Secured loans are usually more cost-effective because they are supported by collateral, resulting in lower interest rates than unsecured loans.

What is a good amount of interest on a loan?

A favorable interest rate for a personal loan is typically on the lower end of the spectrum, which currently begins at around 7 percent. For instance, an interest rate below 11 percent would be deemed good if your credit is excellent, whereas 12.5 percent would be considered less competitive.

What is the difference between bank rate and interest rate?

The bank rate is a quantitative tool for credit control in the economy, used to manage inflation and deflation. In contrast, the interest rate is not a tool for credit control since the central bank does not set it.

Conclusion:

Understanding loan interest rates in Nigeria is crucial for making informed borrowing decisions. Lending rates, influenced by factors like creditworthiness, loan amount, and repayment terms, vary among commercial banks, online lenders, microfinance banks, and peer-to-peer platforms.

Additionally, factors like the nominal interest rate (NIR), effective interest rate, and Annual Percentage Rate (APR) play significant roles in determining the total cost of borrowing. Furthermore, secured loans tend to offer lower interest rates compared to unsecured loans due to the presence of collateral.

Understanding Loan Interest Rates in Nigeria: 2025 Guide