Personal loans are unsecured loans that can be used quickly and easily. These multi-purpose loans can be used to address various personal reasons like weddings, vacations, higher education, medical emergency, etc. Compared to secured loans like home loans or car loans, the personal loan interest rate is higher and starts from 10 .99%.
When applying for a personal installment loan, it is advisable to compare different lenders and choose the one that offers the lowest rate so that your EMIs are affordable. Before that, you must understand several factors that affect interest rates. These factors are stated below-
1. Credit score
Your credit history is the most important factor taken into account when processing your loan application and is maintained by the credit bureaus. A credit score of 750 or higher is considered healthy by lenders and if you have a low credit score your loan application will not be approved.
2. Your income level
Your income is the most important deciding factor for your loan application. The higher your income, the higher your chances of being assigned lower personal loan interest rates. The bank must determine how easily you can repay the loan amount. This is only possible if their income exceeds a certain minimum value. With a higher income, lenders consider you a reliable candidate because you have less chance of defaulting on loan repayments. Let’s say if your income is Rs. 25,000 per month, the lender can offer you an interest rate of 14% and if your income is Rs. 70,000, you can get an interest rate of 12% from the same lender.
3. Repayment history
If you have a good repayment history, you will fare well in terms of interest rates and loan approval. Lenders see that you have been disciplined in your repayments and do not hesitate to offer you a lower interest rate.
If a lender finds a default in your credit profile, they will either charge you a very high-interest rate or may reject your application. Most lenders prefer customers who have not applied for loans in the last 12 months.
5. Your relationship with the bank
Most of us tend to open our savings accounts and fixed deposits with one bank, thus becoming loyal customers. Thanks to this loyalty, you get to share an interpersonal relationship that is likely to yield attractive interest rates when the need for a personal loan arises. As an old customer, you certainly have some leverage on your side, as your existing bank would not want to lose a customer to another bank
6. Reputation of your organization
The reputation of the organization you work with also plays an important role in determining your loan interest rate. The more reputable and stable your organization is, the lower the interest rate on your loan. Individuals working for a reputable organization are more likely to receive low-interest rates on personal installment loans. Banks consider employees working in reputable companies to have a relatively stable career and therefore believe that they would pay regularly.
The availability of a personal loan largely depends on its interest rate. A higher interest rate can lead to higher EMIs. Individual banks and lenders do not charge the same interest rates to each individual as several factors influence this decision.