Factors That Influence Your Personal Loan Interest Rate
5 min read | 5 months ago
What Influences the Interest Rate On Your Personal Loan?
Choosing personal loan finance is a wise move for all those times when you need funds urgently for various reasons. You will not have to dip into your savings or break your investments at such times. Comfortably repay the personal loan over your desired tenure and build your credit history simultaneously. However, the interest rate is one of the crucial factors influencing your personal loan. It directly impacts the amount you pay as your monthly personal loan EMI and the total loan cost.
But have you stopped to wonder what influences personal loan interest rates? Here’s finding out in this article.
Key Factors Affecting Personal Loan Interest Rates
Here are some of the factors impacting personal loan finance interest rates include the following:
- Monthly income- Your monthly income is assessed by the lender to determine whether you can repay the loan comfortably or not. This is why a minimum salary/income criterion is set by most lenders. You can only apply if your salary is sufficient to repay the loan.
- Credit history and score- Your credit history is another important factor influencing your interest rate. The lender will examine your credit history to determine whether you have repaid your debts in a disciplined manner in the past. Past defaults will also be scrutinized (if any) along with your overall loan management. The credit score is also worth noting since it demonstrates your overall creditworthiness. Scores of 700-750 may help you obtain the loan smoothly at a better rate.
- Relationship with the lender- Customers with previous transactions may get better loan interest rates. Lenders usually trust borrowers whose records they already have. They also wish to retain or up-sell/cross-sell to customers with existing accounts, loan accounts, and other transactions with their institutions. An existing relationship can also fast-track the loan approval process considerably.
- Employer reputation- If you work for a reputed company and have a stable job, it creates a positive impression on the lender. It may help you get a better interest rate in some cases.
- Existing liabilities- Your debt-to-income (proportion of debt to your income) ratio should be low. It will help you get a lower interest rate from the lender. If you already have other loans, the lender will assess the percentage of your monthly income that goes into the same. The lower this percentage, the better your personal loan interest rate.
- Economic and market factors- Interest rates are also influenced broadly by market fluctuations, inflation, recession, repo rate policies, and other aspects. In inflationary environments, personal loan interest rates are higher, while recession often equates to lower rates. A cut in repo rates may also translate into reduced interest rates.
Some of these factors are in your control, while some are not. So, how do you get a better rate of interest on your loan? Read on for some more tips in this regard.
Strategies For Securing A Favorable Interest Rate
These are some strategies that you can keep in mind:
1. Improve your credit score- Prior to applying for personal loan finance, try to boost your credit score. You can do this by paying your loan EMIs in a timely manner without defaulting or missing any payment. Try paying off smaller debts like credit card dues quickly as well. You should also check your credit report carefully to find errors that may have led to a lower credit score. Once you have a better credit score, apply for your personal loan.
2. Slash your debt as much as possible- The ratio of utilization of credit to your income is very important. Reduce this and keep it to a maximum of 30%. This is possible if you repay your credit card dues and other loans before applying for a fresh personal loan.
3. Avoid hard inquiries- Suppose you are applying for several credit cards or loans together. In this scenario, each individual application will become a hard inquiry. Avoid them to bypass any negative effect on your CIBIL score.
4, Use a salary account- Apply for a personal loan from the financial institution where you have your salary account. It may help you get a better rate of interest. Sometimes shifting your salary account to a new institution may help you in the same way.
5. Comparisons always help- Narrow down some lenders and compare their rates before making a final decision. Always go for the loan with a more competitive interest rate. Check out loan offers and whether they are suitable for you or not. Processing fee waivers and other promotions may help you cut your loan costs in some cases.
Conclusion
Remember these things prior to submitting your personal loan application. It may help you get a more favorable interest rate. Attempt to boost your CIBIL score and leverage your association with your lender if it is possible. You should also reduce your liabilities before applying. The rate has a direct impact on your EMI and loan outgo. As a result, you should try to keep it as low as possible.
FAQs
1. What is the interest rate for a personal loan?
Personal loan interest rates may vary across lenders. On average, it may range between 12-38% per annum.
2. Can I apply online for a personal loan?
You can apply for an instant personal loan online if you have a high credit score of 750 and above.
About Unity Small Finance Bank
Unity Small Finance Bank is committed to making banking simpler and more accessible for everyone. Our services include Savings Account, NRI account, Current Account, Fixed Deposits, and Personal Loans offering flexible tenures and attractive interest rates. We also offer financing options like MSME Loans and Microfinance to support businesses and underserved communities. Learn more about Unity Small Finance Bank here.
