Personal loans have become every person’s favourite due to its unsecured nature, easy availability, and hassle-free documentation. While education loans and car loans charge a fixed rate of interest, the interest rates for personal loans vary from lender to lender. It is because they have fluctuating interest rates that can range from 11% to 24% depending on how eligible the applicant is for the particular lending institution.
Lending institutions consider various factors to decide personal loan interest rates. So, if you want to avail a personal loan, it is necessary to understand what factors influence your interest rate.
- Credit score
Your credit score is a crucial indicator that affects interest rates for personal loans. It acts as proof showing how prompt you were in the past with the payment of your previous EMIs and credit card bills. Usually, a credit score of more than 750 is considered ideal by most of the lending institutions. Therefore, if your credit score is secure, you can be sure of getting a personal loan at lower interest rates.
However, in case of low credit score, your loan application may not get approved. And, even if it does, you will be charged with a high-interest rate on your loan. So remember, as your credit score increases, the rate of interest will decrease.
- Level of income
It is one of the essential factors that determine the interest rates as well as your eligibility for getting a personal loan. Since a personal loan is a type of an unsecured loan, you don’t have to keep any collateral with the lender to avail it. But, then how will lenders trust you to make the payments on time? It is where salary plays a vital role.
A high and steady salary is an assurance that you can pay off the debt in a hassle-free manner. It is why higher-income people are considered more eligible to get loans at high-interest rates. Whereas, lending institutions tend to reject the loan applications or offer a low rate of interest if the individual is unable to meet the minimum salary requirement provided by them.
- Repayment history
Your repayment history also plays a significant role in ascertaining your loan interest rate. When a borrower makes loan repayments, either on time or post due date, that is reported to CIBIL by lenders. Based on these reports, the CIBIL score of the applicants is calculated, which is then reviewed by the new loan application lenders.
A low CIBIL score indicates bad repayment history and lenders are always cautious about sanctioning loan to such candidates. However, in some cases, personal loan for low CIBIL score gets approved, but the interest charged to them is comparatively higher. Therefore, if you want to avail a personal loan at lower interest rates, you need to ensure timely repayments of your debts.
- Your company’s reputation
Another aspect that impacts your interest rates is the reputation of the company with whom you work. As we discussed before that since you don’t have to keep any security to avail personal loans, lenders have to rely on your income to determine the interest rates. So, if you work in a reputable organisation, the lender is more likely to offer you a lower rate of interest for your loan. It is because they usually perceive employees, working in such organisations, to have a high income and also to be responsible for paying EMIs on time.
On the other hand, while working in a small company, you will not have much stable career and income. So, if you apply for a personal loan, you can expect a higher rate of interest.
Now that you are aware of all the factors that affect your personal loan interest rates, it is time to start comparing the interest rates charged by different lenders so that you can grab an appealing deal.