When a colleague asks to borrow ₹1,50,000 until his society's redevelopment payout clears, the first awkward question is rarely "should I lend". It is "what do I charge". Quote nothing and you quietly lose money to inflation. Quote too much and you feel like a moneylender to a friend. Most people freeze somewhere in between and pick a number out of the air, which is exactly how loans between decent people turn sour.
A fair rate is not a feeling. It is a small calculation you can do in five minutes, and once you can defend the number, the conversation gets easier for both sides.
Start with what the money would have earned anyway
The honest floor for any personal loan is your opportunity cost: what the same money would have earned sitting safely elsewhere. In 2026 a bank fixed deposit returns roughly 6.5 to 7.5 percent, and a liquid fund a little more. If you lend at less than that, you are paying for the privilege of taking on risk, which makes no sense.
So the floor is simple. A fair rate to a low-risk, well-documented borrower starts a notch above a fixed deposit, not below it.
Add a risk premium you can actually justify
On top of the floor, you add a premium for the chance that repayment is late or partial. The trick is to size it to the borrower in front of you, not to a worst-case stranger.
Low risk. A salaried borrower you have known for years, with a clear repayment date tied to a known event, like a bonus or a maturity. Premium of 2 to 4 percent over your floor.
Medium risk. A borrower with irregular income, a longer tenure, or no fixed repayment trigger. Premium of 5 to 8 percent.
High risk. Thin documentation, a history of delays, or an amount that would genuinely hurt to lose. Either price the premium honestly into double digits, or decline. A loan you resent is worse than a loan you refuse.
This gives you a working band for 2026: roughly 9 to 12 percent for low risk, 12 to 16 percent for medium, and a careful conversation above that.
Know the line the law draws
India has no single national usury cap for private individuals, but each state's money-lending Act sets ceilings for anyone lending as a business, and Maharashtra's framework is among the stricter ones. More importantly, courts can and do strike down interest they consider unconscionable, even between private parties, under the Indian Contract Act. A rate that looks like a penalty rather than a price is a rate a court may simply refuse to enforce.
The practical takeaway: a documented rate in the low-to-mid teens for an unsecured personal loan is comfortably defensible. A rate that doubles the principal in two years is not, however the borrower felt at the time.
Flat versus reducing, the difference that surprises everyone
Two loans can quote the same percentage and cost wildly different amounts. On a flat rate, interest is charged on the full original principal for the whole tenure. On a reducing rate, it is charged only on the outstanding balance, which shrinks with every repayment.
A ₹2,00,000 loan over 12 months at 12 percent flat costs ₹24,000 in interest. The same headline 12 percent on a reducing basis costs closer to ₹13,000, because you are not paying interest on money you have already returned. Always state which basis you mean in writing. Most disputes here are not dishonesty, they are two people who each assumed the other meant their version.
A Navi Mumbai example, start to finish
In February 2026, a 34-year-old project manager in Kharghar lent ₹3,00,000 to a former teammate in Panvel whose under-construction flat possession had slipped by four months. The repayment trigger was clear: the teammate's builder-delay compensation, expected by August.
They set the rate at 11 percent on a reducing basis, a touch above an FD for a known, dated, low-risk repayment. On a one-page agreement they wrote the principal, the 11 percent reducing basis, the single repayment date of 31 August 2026, and a default clause stepping the rate to 15 percent only if it ran past that date. Total expected interest: about ₹16,500.
The compensation arrived in July. The teammate repaid early, the interest was a little lower because of the reducing basis, and both turned up to the same Ganpati gathering that September. The rate did not make that happen. The clarity did.
A five-minute fair-rate checklist
- Set your floor at one notch above a 2026 fixed deposit, around 8 percent.
- Add a risk premium sized to this borrower: 2 to 4, 5 to 8, or decline.
- Keep an unsecured personal rate in the low-to-mid teens unless secured.
- Choose flat or reducing, and write the word down.
- Tie any higher default rate to a clear, dated trigger, not to mood.
- Put the whole thing on paper before the money moves.
Make the number stick
A fair rate that lives only in a WhatsApp message is a fair rate you will argue about later. The moment you can write the principal, the rate, the basis, the repayment date, and the default step on a single signed page, the number stops being a feeling and becomes an agreement. That is the difference between lending to a friend and losing one. A documented agreement with a clearly stated reducing rate, witnessed and time-stamped, is the cheapest insurance you will ever buy on both the money and the relationship.
