Why First-Time Borrowers Pay Higher Interest, and How Much It Actually Costs

By BillCut. Last updated October 2026.

Why the rate is higher, stated accurately

For first time borrowers a first loan is priced higher because there is no repayment record to price against, not because lenders distrust new borrowers as a group. The Reserve Bank has said that interest rates are not regulated by the Bank. Lenders set rates through a board approved interest rate model built on cost of funds, margin and risk premium, and they must disclose the rate and their approach to gradation of risk to the borrower.

The phrase that matters there is gradation of risk. Your rate is the base cost of money plus a margin plus a premium that reflects what the lender does not know about you. With no file, the unknown is large, so the premium is large. As a record accumulates the premium has something to shrink against.

Two things follow. There is no ceiling waiting to bring a first-time rate down, so waiting for regulation to fix it is waiting for something that does not exist. And the premium is a price on missing information rather than a penalty, which means it responds to information rather than to argument. What lenders weigh at application is on personal loan eligibility.

A thin file is not a bad file

This distinction is worth making because it changes what you should do. A borrower with no history has an absence of data. A borrower with a damaged history has a record of missed payments. Both may be quoted a high rate, and only one of them has a problem that takes years to fix.

TransUnion CIBIL names four factors affecting a score: payment history, credit mix, multiple enquiries and high credit utilisation. It publishes no weightings. Three of those four require accounts to exist before they can say anything. If you have never borrowed, the file is not reporting badly on you, it is reporting nothing, and nothing is what the premium is pricing. how credit bureaus work covers what a file contains and how it is built.

The practical consequence is that a thin file improves faster than a damaged one. Credit institutions report on the fifteenth and the last day of each month, with submissions inside seven calendar days, so the first entries from a new loan appear within weeks rather than at some vague future point.

What the premium costs, by loan size

This is the table the decision turns on. It shows what five extra percentage points cost on four different loans, comparing an illustrative 14 per cent against 19 per cent.

Loan	Term	Interest at 14 per cent	Interest at 19 per cent	What the premium costs
Rs 30,000	12 months	Rs 2,323	Rs 3,176	Rs 853
Rs 30,000	24 months	Rs 4,569	Rs 6,294	Rs 1,725
Rs 2,00,000	36 months	Rs 46,079	Rs 63,923	Rs 17,844
Rs 5,00,000	60 months	Rs 1,98,048	Rs 2,78,217	Rs 80,169

These figures are illustrative, computed on a reducing balance, and assume the rate is the only difference. The same five point premium costs Rs 853 and Rs 80,169 depending entirely on what you borrow and for how long. A first-time premium on a small short loan is a rounding error. On a large long one it is most of a year’s savings.

What that implies, and it is the opposite of the usual advice

If the premium is proportional, the answer is not to avoid borrowing until the rate improves. It is to take the expensive-per-rupee loan while the rupees are few, and to have a record in place before the loan that matters.

Sequence	What it costs
Borrow Rs 2,00,000 over 36 months today as a thin file at 19 per cent	Rs 63,923 of interest
Borrow Rs 30,000 over 12 months first at 20 per cent, then Rs 2,00,000 at 14 per cent	Rs 3,348 plus Rs 46,079, so Rs 49,427
Difference	About Rs 14,496 in favour of building the record first

These are illustrative and assume the rate improves after a clean record, which is not guaranteed and depends on the lender. The point is the shape rather than the exact figures: the interest on a small record-building loan is small enough that it can be worth paying for what it buys on the next one. Where this breaks down is if the small loan is taken at app pricing rather than bank pricing, because the costs there are an order of magnitude different, as set out on what an instant loan really costs.

Which first loan to take

If the first loan is partly an investment in a record, the product matters as much as the rate. The options differ in what they cost, what they report and how hard they are to get without a file.

Route	Typical cost	What it reports	The catch
Small instalment loan from a bank or large NBFC	Lowest of the unsecured routes	A term loan with a fixed schedule, which is the cleanest record	Hardest to get with no file, and often needs a salary relationship
Loan against a fixed deposit	Usually a small margin over the deposit rate	A reported loan, while the deposit keeps earning	Needs the deposit first, so it suits savers rather than people short of cash
Secured credit card against a deposit	No interest if cleared in full each month	A revolving account with monthly conduct	Only builds a record if used and cleared. An unused card reports little
Consumer durable EMI at the point of sale	Varies widely, sometimes genuinely nil	A short term loan, reported like any other	Only useful if you were buying the thing anyway
App-based short tenor loan	Highest by a wide margin	Reports the same as any other loan	The record costs many times more than the alternatives for the same entries

The last row is the one to be careful about, because it is the route most available to someone with no file and the one that undoes the arithmetic above. The entries on your report are identical whichever route produced them. What differs is the price, and paying app prices for a record you could get from a deposit-backed product is the common mistake.

Two things that do not work the way the advice suggests

Income alone does not set the rate. It is often claimed that a lower earner with good discipline will beat a higher earner. Income and repayment record are different inputs: income affects how much you can borrow and whether you qualify at all, while record affects the premium on top. A first-time borrower on a high salary still has no record, which is why a good job does not remove the premium.

Job tenure is a lender policy, not a rule. Minimum employment periods vary by lender and product and are not set by any regulator, so a figure quoted as a general requirement is one lender’s policy reported as a fact. If a lender declines you on tenure, that is a reason to ask another lender rather than to wait a fixed number of months.

What does not move your rate

The live version of this page said lenders look at how long you have used certain apps, consistency in login patterns and how quickly you respond to messages. That describes conduct the rules restrict rather than a pricing input.

Data collection by a lending app must be need-based and with prior and explicit consent with an audit trail, and lending apps must desist from accessing mobile phone resources such as file and media, contact list, call logs and telephony functions. One-time access to camera, microphone or location is permitted only where necessary for onboarding or know-your-customer requirements. You also keep the right to deny consent for specific data, restrict disclosure to third parties, limit retention, revoke consent and require deletion.

This matters for a first-time borrower more than for anyone else, because a thin file is exactly the profile that gets routed to high cost app lending. An app seeking your contact list is not assessing you more cleverly than a bank. Treat an unusual permission request as information about the lender rather than as a hurdle to clear.

What does move it

Action	Why it works	How soon
Build a short reported record before the big loan	The premium prices missing information, and entries appear on the file fortnightly	Weeks to a few months
Compare documents instead of applying everywhere	Multiple enquiries is one of the four named score factors, and every application adds one	Immediate
Read the Key Facts Statement rather than the advertised rate	The annual percentage rate includes all charges, so two offers become comparable	Immediate
Use the statement’s validity window	At least three working days on a loan with a tenor of seven days or more, which is time to get a second quote	Immediate
Check your own file before applying	You are entitled to one free full credit report including your score each calendar year	Immediate
Keep the first loan small and short	The premium is proportional, so a high rate on a small balance costs little	At the point of borrowing

The second row is the one most often got wrong. Applying to six lenders to find the best rate puts six enquiries on a file that has almost nothing else in it, which is a larger proportional signal on a thin file than on a thick one. Comparing two Key Facts Statements achieves the same comparison with no enquiries at all.

Reading an offer when you have nothing to compare it against

A first-time borrower has no sense of what is normal, which is the condition a bad offer relies on. Four checks replace experience.

1. Ask whether the rate is flat or on a reducing balance, and whether it is monthly or annual. These three conventions produce very different costs from the same number, and the difference is set out on annual percentage rate on a loan.
2. Read the annual percentage rate, not the interest rate. Lenders must state an annual percentage rate, which is the annual cost of credit including the interest rate and all other charges, with a computation sheet showing how it was reached.
3. Check what is not in the statement. Fees and charges not mentioned in it cannot be levied at any stage during the term without your explicit consent, so the document is also a limit. A broader inventory of what a loan can carry is on hidden loan charges.
4. Compare total interest over the term, not the monthly instalment. A longer term always produces a smaller instalment and usually a larger total.

Who this applies to, and who it does not

This applies if you have never borrowed and are about to, or have borrowed once and are deciding whether to borrow again before the record builds. The sizing advice is the part worth acting on, because it is available only before the first loan is taken.

It does not apply if your rate is high because of missed payments rather than missing history. That is a different problem: the file is reporting something rather than nothing, and the fix is time plus a clean record rather than the sequencing above.

It also does not apply to secured borrowing. A loan against property, gold or a deposit is priced mainly on the security, so the thin-file premium is much smaller and the sequencing matters much less.

Where BillCut fits

BillCut is a debt refinancing platform. It restructures existing debt into lower cost instalments. if a first loan was taken at a high rate and the record since has been clean, the rate you qualify for now may be well below the one you are paying. BillCut refinancing is one route for that, and the test is whether the saving over the remaining term exceeds the cost of moving, which depends on how many months are left rather than on how high the rate is.

Frequently asked questions

This article is for general information and is not financial advice. Figures marked illustrative are examples used to show how the arithmetic works and are not the rates or terms of any particular lender. Your own figures are in the Key Facts Statement and loan agreement you are given before accepting. BillCut does not lend and does not recommend any lender.