Personal loans are one of the most in-demand financial products in the recent market. An RBI report shows this financial product holds a 29.1% share in the Indian credit market as of FY2021. Diving deep into its popularity, this credit instrument offers convenience and favourable features that allow borrowers to meet various financial requirements without any hindrance.
However, like any other loan offer, interest rates here significantly impact the total outstanding amount. Therefore, if applicants can acquaint themselves with the factors that affect personal loan interest rates, they can work accordingly to secure a better loan offer.
Top 5 factors that affect personal loan interest rates
Here are the few factors that can affect the interest rate on personal loans –
Credit profile of an applicant
The credit profile of an applicant plays an important role here. It includes the credit score and repayment history, which depict the creditworthiness of an individual.
Applicants with a high credit score, especially above 750, get preference while applying for a loan. On the other hand, the repayment history offers a glimpse into an individual’s past performance as a borrower. Lenders refer to this record to check if a particular applicant has closed all his/her previous debt properly and are managing the current ones well.
Therefore, individuals who can meet these parameters can successfully negotiate a competitive interest against their personal loan application.
Nonetheless, if anyone is struggling with this factor, they can take necessary measures to improve personal credit score.
The monthly income of an applicant is another factor that determines personal loan interest rates. It is widely accepted that individuals with a high disposable income get preference in such cases. The reason being, they have better repayment capabilities than others.
Therefore, such individuals can easily secure a more attractive interest rate against their personal loan application than those in a lower income bracket.
In the case of unsecured credits, such as personal loans, lenders also consider the reputation of the applicant’s employer. In this regard, those working with MNCs or in the public sector are perceived to have a steady and secure income source than others.
Resultantly, they are privy to better interest rates and favourable loan terms as they are considered responsible borrowers. In addition, potential debtors can refer to online interest rate calculators to learn more about their total outstanding amount.
Working relationship with a lender
Individuals with an existing working relationship with a lender can easily secure a small personal loan with favourable terms. It includes lower interest rates, better repayment options, and many more.
The reason being, financial institutions feel comfortable in lending to consumers that they know well. Herein, it’s also important that such individuals have previously repaid their debts without any delay. That way, lenders can be sure of an applicant’s credibility.
Hence, they tend to offer loans at reduced interest rates and facilities that make it easy for individuals to borrow funds. One such facility is a pre-approved offer. Leading financiers, including Bajaj Finserv extend this facility to their current customers. These offers streamline the loan application process and save valuable time. Available on a host of financial products, borrowers can now check their pre-approved offer online by providing a few documents.
This ratio represents an individual’s total debt versus total income. Lenders use this system to learn about the disposable income of borrowers and gauge their repayment capacity.
For instance, suppose your monthly earning is Rs.1 lakh, and you spend Rs.40,000 on debt repayment. Considering other fixed expenses, you may have about Rs.15 – 20,000 left at the end of a month. Thus, if you apply for a loan of Rs.8 lakh for 5 years at 10.5% interest rate, your EMI will be about Rs.17,000. In this case, your loan application may get approved, but you will not be in a position to negotiate a lower interest rate.
Hence, financial experts recommend that individuals should work to keep this ratio low, as this is an effective way to avail better interest rates on personal loans.
These are some notable factors that play a part in determining personal loan interest rates. Keeping them in mind and improving upon these factors can allow individuals to secure credit at a more competitive rate and without any hassle.
Besides these, borrowers can visit the personal loan app of their preferred lender to learn more about their loan offers, eligibility criteria, and documentation.
Personal loan interest rate varies from one lender to another and borrowers can draw a comparison to find the best loan offer possible. They can keep the above-mentioned pointers in mind to get loans at better interest rates. Also, they can keep some easy approval tips for a personal loan in mind to ease this process further.