5 Factors that affect your Personal Loan Interest Rate

  • Updated on: 10 Apr 2023
  • Published on: 8 Nov 2021
5 Factors that affect your Personal Loan Interest Rate

Personal loans are becoming a popular source of financing as a result of expanding needs of the average Indian consumer. Quick personal loans help fulfil both, emergencies or unforeseen demands along with your planned goals. 

You can utilise personal loans to support a range of requirements such as:

  • Paying utility bills
  • Home renovations
  • Wedding expenses 
  • Vacations or trips
  • Higher education fees
  • Medical emergencies

Due to its multipurpose benefits, unsecured nature and speedy processing, personal loans can come in handy to meet all your needs. With attractive personal loan interest rates in India, you can easily handle loan repayment too. 

That’s not the only reason that personal loans are appealing. Nowadays, one can get a personal loan in less than 5 minutes. However, make sure you consider a few pointers before applying for the same. 

While you can rely on a number of tips to get a personal loan approved quickly and can forecast your ability to repay it on time in the future, the interest rate of a personal loan can have a significant impact on your finances. 

In the case of certain other secured loans, the interest rate is more or less fixed for all consumers. Personal loan interest rates, on the other hand, can vary based on your profile and the lender’s eligibility criteria. Take a look at 5 factors that can affect your personal loan interest rate.

1. Credit score

When it comes to loan approvals, especially for unsecured loans like a personal loan, your credit score is crucial. It is even more important in this case as it influences the interest rate of personal loans. A credit score, in general, indicates your overall financial health in terms of income, existing debt, borrowing behaviour, and previous repayment history. This three-digit numerical ranking is assigned to individuals by a credit rating agency like CIBIL.

A higher credit score increases a lender’s trust in your sense of financial responsibility. This allows you to get a personal loan at a more competitive interest rate. A CIBIL score greater than 750 is generally perceived as ideal. In order to avail a personal loan at a rate of interest that is low, all you need to do is maintain a healthy credit score.

2. Income

Your income also determines whether or not you qualify for a personal loan. The higher your income, the better your chances of acquiring a personal loan with a reduced interest rate. 

This is because your income determines how easily you can repay the loan. With a higher salary, you can look forward to getting credit at affordable personal loan interest rates. However, this is possible only if your income exceeds a particular threshold set by the lender.

3. Debt-to-income ratio

Even if you work for a well-known company and receive a high salary, what matters is how much you spend on repaying your debt every month. All your existing loans can have an impact on the personal loan interest rates you pay on a new loan.

This is where your debt-to-income ratio comes in play, which is the sum of all your loan payments divided by your total income. A higher debt-to-income ratio indicates that your debt is more, and a lender may impose higher personal loan interest rates as a result of this factor.

4. Loan payment and credit history

Before approving a loan, a lender typically checks your credit report to learn more about your credit history. In addition to your credit score, this report outlines your previous repayment history. 

If you have been punctual with your repayment, you can get an affordable personal loan interest rate from a lending firm. However, lenders reject applications outright if they find that a borrower has defaulted on any payments in the last 12 months.

5. Relationship with the lending institution

The interest rate of personal loans is also impacted by your past and current association with a lender. Most lenders want to keep you on as a customer. So, if you are an existing customer with a good profile, you can get exciting pre-approved loan offers as well as a competitive interest rate. Moreover, this relationship can speed up your loan approval process, giving you access to funds quickly. 

As you can see, the interest rate of a personal loan is influenced by the five criteria mentioned above. Carefully consider and evaluate them before applying for personal loans in order to get the best offer and repay stress-free.

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