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6 Factors that Affect Your Personal Loan Interest Rate

Published on Mar 30, 2021Updated on Jul 17, 2023

6 Factors that Affect Your Personal Loan Interest Rate

With the growing needs of the average Indian consumer, personal loans are now witnessing a huge rally and continue to show growth at an amplified rate. Oftentimes, people need fast, personal loans to meet emergency or unexpected needs. Personal loans are very useful to arrange funds for weddings, holidays, higher education tuition fee, organising events, project renovations, medical emergencies, etc. Serving multipurpose benefits, unsecured in nature and quick online processing make personal loans widely accepted for many people.

A Personal loan might feel alluring to many, but there are a few factors that you should take into account before even applying for a personal loan. Even after evaluating all the adequate scenarios regarding your requirement for a personal loan, and also knowing that future prospects look stable for making full payback of a potential personal loan, interest rates play a major factor affecting your repayments.

Rate of interest is more or less fixed for all borrowers in case of home loans and car loans. But personal loans interest rates can vary, depending on the individual borrower and on the eligibility criteria defined by the lender. Hence, it is commonly a good practise to know all the necessary details that will affect your personal loan interest rate.

Must Read: How to Get a Personal Loan at the Best Interest Rate

Following are Some of the Major Factors that can Affect your Personal Loan Interest Rate:

1. Income

Your income forms the basic element which determines your personal loans interest rates. It is a universally accepted truth that responsible people with high disposable income have a greater repayment capacity than those with lower incomes. It is a common practise in the lending sector that people with high and stable disposable income tend to obtain lower interest rates on their loans. Whereas, this might not be the case for borrowers having lower income levels.

2. Credit Score

Credit score plays a very important role in loan approvals. In case of personal loans, credit score becomes much more necessary, as it not only decides whether the loan is approved but also affects the interest rates. Generally, credit score reflects the overall financial health of a person in terms income, existing debt, borrowing behaviour, and past repayment history. A higher credit score amplifies the level of trust in the borrower’s sense of financial responsibility, even helping them to take loans at lower interest rates compared to others. Usually, a score of more than 750 is considered to be a good CIBIL score.

3. Employer’s Status

Since personal loans are typically unsecured, lenders look out for various factors that assures the applicant’s creditworthiness and Your employer is one of the factors among them. The reason for this is quite simple- borrowers employed by a well-known organisation are thought of being more financially solvent and responsible for making timely payments., oftentimes lenders may have much relaxed lending policies for borrowers working with certain organisations.

4. Debt-to-income Ratio

Say you are employed by a well-known company and earn quite a high salary, but you have a major part of your salary going in debt repayments. In this case, all your prior debts are surely going to affect your potential personal loans interest rates. Debt-to-income ratio is simply the ratio of all your debt payments divided by your total income. Higher debt-to-income ratio conveys more debt burden on the borrower’s part, and the lender may charge a higher interest rate on your loan due to this factor.

Must Read: Refinance your Personal Loan at Lower Interest Rates

5. Relationship with the Lender

Lenders tend to be more lenient in charging interest rates when lending to a trusted customer. Due to their long and loyal relationship with each other they nurture a quality of inter dependability.

This trust doesn’t build overnight and it requires a long period of time and responsible behaviour by customers of the bank by maintaining their loyalty, this might also be the case with peer-to-peer lending. When individual or institutional lenders see your loyalty towards them, they are much likely to offer you a more viable deal than what newer customers would get.

6. History of Defaults

Similar to checking the credit score, if a lender finds out defaults in your credit history, they will either charge you a very high rate of interest or might even reject your loan application. Most lenders prefer customers with zero defaults over the past 12 months.

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