As the name suggests, a personal loan can be used to meet our personal fund requirements such as wedding, home renovation, child education or vacation. Personal loan is the easiest and quickest loan you can get. You don’t need to explain the lender, how you intend to use the loan amount. But, you have to look out for the interest rate. The interest rate is one of the main costs associated with the unsecured personal loan. Higher the interest rate, higher is the amount to be repaid and vice versa. Lenders do not offer the same interest rate to all Borrowers. A personal loan is offered at variable interest rates ranging from 10.5% to 24%. Unlike education loan or home loan, a personal loan Interest rate changes from individual to individual based on factors like Borrower’s credit score, past loan repayment history, job history, income, etc.
Everyone would like to have a lower interest rate. Let’s look at the factors affecting your personal loan interest rates:
Your level of income is one of the most deciding factor, when you apply for personal loan. Your income and job stability are an assurance of repayment of the loan for the lender. Higher your income, the lower the interest rate lenders will charge you. As personal loans are unsecured, that means no collateral is provided against the loan. The only way the bank can trust that you will repay the loan is by checking your income, whether it is stable or not. Lenders usually reject loan applications of the applicants, who do not have consistent flow of income.
Credit history is the most crucial factor taken into account while processing your loan application. For taking a personal loan, you should have a good credit score as it reflects your past repayment behaviour. Your credit score is calculated by credit accounting agency CIBIL (Credit Information Bureau India Limited) on the basis of repayment of past or current loans and your credit card bill payment. A good credit score starts at around 700. If you have a good credit score, banks will award the applicant with lower interest rate and if your credit score is more than 800, there is a chance that you will get 0.25% reduction in interest rates. If you have a bad credit score, lenders either reject your loan application or put high interest rate. Therefore, update your credit history before approaching lender, try to rectify any errors.
When finalizing interest rate of your personal loan, the lender also check the reputation of your organization. The reputation of an applicant’s workplace is also a contributing factor in determining personal loan interest rate. If the applicant work in a company that is stable and well-established, the interest rate will be lower. This is because, good company reflects your job stability and the ability to pay back loans easily. But if you are working with a start-up or a relatively smaller firm that is not very well known then a higher rate will be charged.
Relationship with the Bank:
If you have savings account, fixed deposit account or any other loan account in one bank that builds an interpersonal relation between lender and customer. Financial institutions and banks allow their existing loyal customers a lower rate of interest because the lender has some idea about your financial standing. On the basis of your good relationship with the bank, you can negotiate for better interest rates and banks never want to lose out their old loyal customer to some other banks.