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5 Major Factors That Can Affect Your Personal Loan Interest Rates

by Steven Brown
Personal Loan Interest Rates

Over recent years, collateral-free personal loans attained immense popularity among customers. Thanks to the flexibility of fund usage and competitive personal loan interest rates. Besides, various macro-economic factors have reduced interest rates significantly. Some of the reasons include-

  • The current repo rate is fixed at 4%, which has dropped to the lowest level since 2000.
  • For NBFCs, the RBI has announced a reduction in the present average base rate by 0.15% during last year.

Moreover, individuals can lower their interest burden by following some of the necessary financial practices, regardless of the market conditions.

5 Major Factors Affecting Personal Loan Interest Rates

Since payable interest against personal loan determines the borrowing cost, customers must know how to keep it affordable. Although personal loans might be tempting, certain factors need to be considered before applying for a personal loan. Even after estimating the probable scenario for a personal loan, interest rates play a significant role in affecting one’s repayments.

Hence, it is commonly a wise practice to know about all the necessary information affecting personal loan interest rates:

  1. Applicant’s income

An individual’s income is the primary element that determines personal loan interest rates. Based on the employment stability and monthly income of a borrower, financial institutions levy interest rate against a borrowed amount. It is a known factor that an individual with higher disposable income will have greater repayment capacity.

Besides, it is prevalent in the lending sectors that borrowers with a high and steady income possess higher chances of obtaining the lowest personal loan interest rate. Applicants with higher income are considered reliable candidates with a minimal chance of repayment default. 

For example, if a borrower’s income is Rs.25,000 per month, the lender might levy 16% interest rate against the loan, while with an income of Rs.75,000 per month, one can get 14% interest rate from the same lender. This is why lenders assess one’s monthly income before sanctioning a loan amount.

  1. Credit score

A credit score is a vital aspect lenders consider when approving a loan amount. Usually, a score above 750 is deemed healthy for instant loan approval. This factor becomes even more stringent when applying for collateral-free loans like a personal loan.

Intending borrowers can follow certain tips to improve their credit score and loan eligibility:

  • Keep a healthy balance between secured and unsecured credits
  • Maintain a credit utilisation ratio below 30%
  • Pay off all existing debts before applying for a credit

Besides, borrowers must know about the ideal CIBIL score for a personal loan and improve it accordingly to avoid hassles during loan approval.

  1. Type of interest

One of the factors affecting personal loan interest rates is its category. Usually, a personal loan is available at both fixed and floating interest rates. As the name suggests, a fixed interest rate remains the same throughout the repayment tenor and does not change as per market conditions.

On the contrary, floating interest rates change with market fluctuations and other factors, such as repo rate. However, floating interest rates are comparatively a bit cheaper than fixed rates. 

Therefore, before opting for a particular interest rate, individuals can use a Personal loan EMI calculator or an interest calculator to determine the overall interest outgo and EMIs during the tenor.

  1. Eligibility parameters

Financial institutions have updated their eligibility requirements to minimize the delinquency rate since personal loans’ outstanding balance has witnessed a significant y-o-y growth of 15.3% during 2020. Although qualifying parameters differ based on lenders, meeting lender-specific parameters are necessary to avail better interest rates on a personal loan. Some of the parameters include-

  • Applicant’s age should be within 21-67 years
  • One must be a salaried employee in a reputed MNC or private organization
  • CIBIL score must be 750 and above

Therefore, individuals can settle for affordable interest rates by meeting these parameters. Besides, individuals can also avail of an online personal loan through various convenient personal loan apps introduced by reputed lenders.

  1. Lender’s relationship with the borrower

Usually, lenders are lenient while levying interest rates to a trusted customer. By repaying credits responsibly on time, one can build this trust factor over time. When lenders notice this loyalty of their customers, they are more likely to offer them attractive interest rates.

Besides, reputed NBFCs extend pre-approved offers on a wide range of financing options, such as personal loans, business loans, credit cards, etc. These offers significantly reduce the hassle of extensive documentation and save time. Customers can check their pre-approved offers online by mentioning their essential credentials.

To sum it up, these are some of the crucial factors that determine personal loan interest rates. However, there are always opportunities to improve eligibility and avail of better loan terms.

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