By FMTeam Personal loans are a very popular form of finance for many expenses such as education funding, weddings, travel, etc. Personal loans differ from secured loans because they do not require any collateral to be placed, making it easy and convenient. Still, one key factor to consider when applying for a personal loan is the interest rate, which may greatly determine the repayment amount. Understanding the factors influencing these personal loan interest rates will help you get the best deal.
What Is a Personal Loan and Its Interest Rate?
A personal loan is an unsecured loan given to the borrower without requiring them to pledge any security. These loans are versatile, allowing you to use them for any purpose, such as medical emergencies, home renovations, or travel.
The personal loan interest rate determines how much you’ll repay beyond the principal amount. It varies between lenders and is usually higher than secured loans like home loans because the risk for the lender is greater. Your eligibility and financial profile play a significant role in deciding the interest rate you’ll be offered.
Key Factors That Affect Personal Loan Interest Rates
Knowing the determinants of personal loan interest rates may help you negotiate better terms. Here are some of the most important considerations used by lenders:
Credit History and CIBIL Score
Your credit history is one of the most important factors in determining the interest rate for your loan. A lender will examine your CIBIL score, a three-digit number that summarises your credit repayment behaviour.
- A good score of 750 and above is a strong indication of creditworthiness, which leads to a lower interest rate.
- Low scores, however, signal financial risk, which can result in higher interest rates or even loan rejection.
- Good credit scores are ensured by repaying loans and credit card bills on time to get the best possible loan terms.
Income Level
Your income level determines the interest rate on a personal loan that a lender offers.
- A stable, high-income earner is regarded as a good borrower, so loans are offered at relatively low interest rates.
- The opposite is a variable or low earner, who is perceived to have risks of repayment and thus may get higher interest rates.
- To increase your chances of getting a competitive rate, you must meet the lender’s minimum income criteria and provide evidence of financial stability.
Type of Employment and Stability
Your job profile and employment stability play a crucial role in deciding the personal loan interest rate.
- Salaried people working in government or other reputed private organisations are given lower interest rates as their job is considered more secure.
- Self-employed individuals or business owners could attract slightly higher rates because their sources of income can be inconsistent.
- Consistency in employment history and evidence of job security enables you to bargain for more ideal loan terms.
Relationship with the Lender
The interest rate for your loan may also vary based on your existing relationships with lenders.
- If you have a history of timely payments or hold your savings account with a given bank, you are always eligible for preferential offers.
- Loaning consumers have access to negotiate interest or offer favours regarding their relationship with a financier.
- Establishing trust with a bank or other financing organisation and maintaining positive interactions may be very helpful for someone applying for personal lending.
Payment Records and Loan Defaults
Interest on personal loans also depends much on how consumers’ payback records would work in their favour.
Borrowers with a spotless repayment history are considered low-risk and, therefore, receive loans at relatively lower interest rates.
Conversely, a history of defaults or late repayments can attract a higher interest rate or lead to outright rejection.
Financial discipline and timely repayments will increase your likelihood of getting an attractive personal loan interest rate.
Why Do Personal Loan Interest Rates Differ?
The variability in the personal loan interest rates arises from the lender’s risk assessment. Each borrower presents a different level of financial risk based on their creditworthiness, stability of income, and repayment capacity.
Although secured loans carry lower rates because they involve collateral, personal loans are purely based on the borrower’s financial profile. Therefore, understanding and improving the factors above is crucial for obtaining a competitive rate.
How to Get the Best Personal Loan Interest Rate?
To get the best personal loan interest rate, consider the following tips:
- Check and Improve Your Credit Score: Monitor your credit score regularly and correct any errors. Target a score of 750 or more.
- Compare Offers from Multiple Lenders: Research and compare interest rates across various banks and financial institutions.
- Financial Stability: Show that you have a stable income and employment history. This will show the lender that you can pay off your debt with stability.
- Negotiate with Your Lender: If you have a good relationship with your lender, then do not hesitate to ask for a reduced rate.
- Shorter Loan Tenures: Shorter tenures tend to have lesser interest rates. It makes the total cost of the loan relatively cheaper.
Unlock Financial Freedom with the Right Loan
Personal loans are convenient financial solutions, but the interest rate can affect your repayment journey. Understanding the factors influencing personal loan interest rates and taking proactive steps to enhance your financial profile can help you secure the best deal and enjoy financial freedom without undue stress.
Stashfin provides instant personal loans of up to ₹5 Lakhs with benefits such as 30 days of interest-free credit, interest charge only on the amount used, and tenures for repaying, which can go up to 36 months. Be it a dream vacation, paying for some unwanted expenses, or renovating your house, Stashfin is there to be the best solution for all of your needs.