Factors That Affect Personal Loan Interest Rate

January 10, 2022

Are you confused about the affordability of a personal loan? The financial implication greatly relies on the personal loan interest rate. The interest rate for a personal loan varies from one applicant to the other. 

There are numerous factors determining the interest rate of a personal loan. So it is important to meet the eligibility criteria of the lender in order to receive great deals on the interest rate of the personal loan. Since the personal loan is a great instrument for meeting the lost financial needs, it is significant to understand what it is in detail and the factors affecting personal loan interest rates. 

What is a Personal Loan?

Simply put, a personal loan is an unsecured loan taken by the individual to meet their personal expenses. The key criteria to decide the approval or rejection, as well as the personal loan interest rate, is the credit history, credit score, profile of the applicant, employer, employment history, etc. The loan is a constrained-free loan, the borrower has no restrictions set by the lender on the usage of the loan amount.

More customers are opting for personal loans as the loan helps in meeting the shortfalls of their households, such as home renovation, education of children, marriage affairs, buying a car, etc. 

As the personal loan is an unsecured loan, the applicants do not need any asset as collateral security against the loan amount. Hence, the personal loan interest rate is comparatively higher than a car loan, home loan, or gold loan. 

Documents Required for a Personal Loan

There are some required documents by the lenders and lending institutions to lend you a personal loan. Here is the list of some common documents required for availing a personal loan by all the lenders:

  • Identity Proof
  • Address Proof
  • Income Proof
  • Copy of Passport and Visa (in case of NRIs)
  • Bank Statements
  • Salary Slips
  • Passport size photographs

How to Get a Low Personal Loan Interest Rate?

Improving CIBIL Score

A good CIBIL score is important for availing the loan. A high CIBIL score will determine that you are creditworthy. If you have a high CIBIL score, the financial institutions offer the best deals on personal loans, such as low interest rates. Moreover, it is important to check the credit score before applying for a personal loan. In case your CIBIL score is less than 700, try to improve it before applying for a loan, as it is one of the factors determining interest rates on personal loans. If your credit score is above 750, there are higher chances of getting the loan at low interest rates.

Make Repayments on Time

Your credit card can have negative effects in case you forget or delay paying the loan or credit card repayment bills. Lenders will take the repayment history into consideration before deciding the interest rates on the personal loan. If you have paid all your loan and credit card bills on time, the lender will provide you with the loan at a low interest rate.   

Keep an Eye on Offers

Once in a while or during festival season, financial institutions offer the personal loan at low interest rates for a limited time offer. Keep an eye on these loan offers and apply for personal loans during the offers. It will help you in getting a personal loan at a low interest rate.  

Compare Rate of Interest

Before applying for a personal loan in any financial institution, one of the important factors determining interest rates is comparing the offers on a personal loan by various financial institutions. Hence, it is important to compare the personal loan by various lenders before applying for one. It will help in availing the loan at a competitive interest rate.   

Try to negotiate with the lenders

Negotiation is the key to getting the best offers on personal loan interest rates. If you are on good terms with the financial institution or an existing customer of the financial institution, you can negotiate with them for the lowest rate of interest on the loan. The best way for negotiation is to submit a formal written letter to the financial institution. 

Factors Affecting Personal Loan Interest Rate

In a home loan and car loan, the interest rate is most likely to be fixed or a little less or high for all the customers. But when it comes to a personal loan interest rate, they will vary from customer to customer. The difference between the interest rates depends upon the profile of the applicant, eligibility criteria and required documents by the lender. Additionally, it is important to know all the factors that affect the personal loan interest rate.

Income of the Applicant

Your income is one of the most basic factors determining the interest rate on a personal loan. An applicant who has a high income has a higher capacity of repayment on loan as compared to the ones with low income. It is the common lending method in the sector, the ones with higher income are more likely to get a personal loan at a low-interest rate. Whereas this is not in the case of applicants who have a lower income range. 

Status of the Employer

Personal loans are unsecured loans and hence, the financial institutions will look up to a number of factors before accepting the loan application. The organisation you are working in is one of the factors affecting personal loan interest rates. Lenders have a quite simple logic behind this, as the employees of well-known companies are less risky, are financially solvent, and are responsible for timely payments of the loan. Often the lenders will offer relaxed policies for the borrowers working in certain organisations.

Default History

Similar to the credit score, there should be no defaults in the credit and payment history of borrowers. If the lender checks and finds any defaults in the credit history, they will give you a personal loan at a high-interest rate. Sometimes, the personal loan application will be rejected as well. The lenders often prefer applicants with zero defaults in credit history over the last year.

Age of the Applicant

The minimum age to avail a personal loan is 21 years, and the maximum varies from 65 to 70 years. The applicants who are older and nearing the age of retirement will get personal loans on high interest rates. Whereas the lenders who have just started out will be charged a low personal loan interest rate. 

Relationship with the Lender

If you are an existing and trusted customer of the lender, you will receive a personal loan at a low interest rate. The lenders offer good deals on personal loans to their trusted customers. As they have known each other for a long time, they nurture the inter-dependability quality of each other.  

The trust between the lender and its customer is not built overnight. It takes a long time for responsible behaviour to maintain the loyalty factor by both parties. Hence, try to build a trustable relationship with your financial institution by making payments on time. This will help you to get viable deals on personal loans in future. 

CIBIL/Credit Score

CIBIL score is one of the important factors affecting the personal loan application. In the application of a personal loan interest rate, the credit score becomes much more important as it decides the approval, rejection, and interest rate on the personal loan. The credit score is the factor that determines the financial standing of the applicant in terms of their income, behaviour on borrowing, existing debt/s, and the history of repayments. A higher CIBIL score shows that the applicant will be a creditworthy borrower and offers them at a low personal loan interest rate. If you have a low credit score, then the lender will tag you as a risky borrower. A CIBIL score of 750 and above is considered to be a good credit score.

What is a good CIBIL score for a personal loan?

A good CIBIL score plays an important role in getting viable deals on a personal loan interest rate. In this section, know what CIBIL score is good for getting a personal loan.

CIBIL Score Ratings of CIBIL Score Chances of Personal Loan Approval
CIBIL Score Between 800 to 900 Excellent Faster approval of personal loans with low interest rates. Also, the borrower can get a larger loan amount.
CIBIL Score over 750 Good Personal loan applications will be approved with a low interest rate. 
CIBIL Score Between 600 to 700 Average Personal loan application might get accepted but it will be accepted at a high personal loan interest rate.
CIBIL Score less than 600 Poor Application is most likely to be rejected or the lending institutions will declare you not qualified for availing the personal loan amount. 

Modes for Personal Loan Repayment

Repayment Mode Description
Post Dated Cheques (PDCs) These are the cheques that have been issued for the dates in future. These cheques are being used by lenders for encashing or depositing the amount mentioned on it.
Standing Instruction or Debit Mandate  At regular intervals, you can instruct your bank to pay off a decided amount to another bank or any other bank account. Through this Standing Instruction or Debit Mandate system, your bank will pay off the decided amount towards your loan repayment.
Electronic Clearance Systems (ECS) It is one of the most common methods of repayment. In this method, the funds are transferred from one bank account to the other bank account electronically.
National Automated Clearing House NACH is the program offered by the National Payment Corporation of India (NPCI) for all the financial institutions in the country. Through NACH, the real-time processing of transactions is possible and can be used for the repayment of personal loans.

Fixed and Floating Personal Loan Interest Rate

Fixed personal loan interest rate offers interest rates at the same rate of interest throughout the repayment period of the loan. 

On the other hand, the floating personal loan interest rate is associated with the lending rate for marginal cost/marginal cost of lending rate (MCLR). Hence, the personal loan interest rate will fluctuate with the changes or fluctuation in the MCLR.

If you opt for a fixed personal loan interest rate, you will have an idea about how many monthly payments in the form of EMIs you will have to pay during the loan repayment tenure.

In case you are okay with the fluctuations in personal loan interest rate, you can opt for a variable interest rate. The benefit of variable interest rates is that the EMIs will be reduced when the MCLR is low.

FAQs

What are the 3 main factors that affect interest rates?

The three main factors that impact personal loan interest rate are credit score that determines the creditworthiness of the borrower, loan-to-value which determines the appraised value of the borrower’s property, and debt-to-income which determines the cash flow of the borrower.

Why is the personal loan interest rate so high?

Since, a personal loan is an unsecured loan, so there is no need for any collateral security to avail the loan. This is the reason for high personal loan interest rates.

Does personal loan affect home loan eligibility?

Yes, it does. If an individual does not pay back the personal loan on time, it will have a negative effect on the credit score and the score can go low. Hence, the credit score for a home loan will also be low, affecting the home loan eligibility.

Can I get a home loan after a personal loan?

As long as the lending institution deems you financially credible, you can get a home loan after a personal loan and vice versa.

Is it possible to get a low personal loan interest rate rather than the one advertised by the lender?

Yes, you can get a better deal on the personal loan interest rate rather than the one advertised by the lender. This is the part where negotiation comes in. Good negotiation with the lender can help you to get a better deal on the personal loan interest rate.

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Category:Personal Loan

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