Factors Affecting Personal Loan Interest Rates

Personal loan interest rates affect the overall borrowing cost of a personal loan. Lenders usually offer interest rates based on various factors including credit score, monthly income, employment profile, applicant’s existing relationship with the lender, employment history and EMI/NMI ratio. Banks/NBFCs evaluate the credit risk of the applicant based on the aforementioned factors and offer interest rates accordingly. Applicants with low credit risk can secure personal loans at lower interest rates. Let us have a detailed look at how these factors affect the personal loan interest rates.

Factors that Influence the Personal Loan Interest Rates

Credit Score

Credit Score is one of the crucial factors influencing the personal loan interest rates set by the lenders. Most lenders offer differential interest rates based on the credit score of the applicants. Individuals having a credit score of 750 and above usually have higher chances of availing personal loans at lower interest rates. Individuals having a low credit score or no credit score may also avail personal loans but at a higher interest rate. 

Employment Profile

Applicant’s job profile is yet another factor that impacts the personal loan interest rates. Lenders usually offer lower interest rates to salaried applicants as compared to self-employed individuals. Among the salaried applicants, individuals employed with the Central/State Government sector are offered preferential interest rates due to job security and income stability.

Monthly Income

Applicants having a minimum monthly income of Rs 15,000 are eligible for availing personal loans. Lenders usually offer personal loans to applicants whose EMI does not exceed 50-55% of their net monthly income, including their existing EMIs and EMIs of the proposed personal loan. Such borrowers reflect high income and high repayment capacity reducing the risk of loan default and, hence, may avail personal loans at low interest rates.

Employment History

Lenders check the employment stability of its applicants before offering them personal loans. Applicants who have been frequently changing jobs and have an unstable employment history are considered to be carrying higher credit risks. Such applicants either do not qualify for personal loans or are offered personal loans at high interest rates.

Applicant’s Existing Relationship with the Bank

Most lenders offer pre-approved personal loans or preferential interest rates to their select existing customers who already have a savings/current/FD/loan account with the bank or have availed a credit card from them. Therefore, applicants should check for any pre-approved offers with the banks/ NBFCs with whom they are already associated.

Tips to avail Personal Loans at Low Interest Rates

To avail personal loans at low interest rates applicants may adopt the following strategies:

• Maintain your credit score at 750 and above
• Avoid taking multiple loans in a short span of time
• Check for pre-approved offers with the banks/NBFCs where you already have a savings/current/FD account or have availed a loan or credit card.
• Visit online financial marketplaces like Paisabazaar and compare the interest rates offered by various lenders and opt for the lender offering lowest interest rates.

A higher interest rate results in an increase in the overall interest cost. Therefore, it is very important to know the factors that influence the personal loan interest rates, and follow them in order to avail lower interest rates.