A personal loan is an unsecured loan and one of the easiest and quickest loans to avail. Unlike a home loan or an education loan, a personal loan is not specific to any purpose and can be used in various situations to deal with a fund shortage. You can opt for a personal loan if there is a medical emergency or you are planning to get married, go on a long- due vacation, renovate your house, etc.
Since it is a collateral- free loan, banks usually charge a higher rate of interest on a personal loan, as compared to secured loans like education or home loans. The interest rates for personal loans start from 10.99%. However, interest rates for personal loans from the same bank vary, according to the borrower’s credit score, income, employment type, loan repayment history, etc..
Factors That Affect Your Personal Loan Interest Rate
There are various factors considered by the banks based on which your rate of interest is decided. The factors that may influence your interest rate are as follows:
- Credit Score: A credit score is basically a 3 digit summary of your credit history that acts as a record of how regularly have you paid your EMIs and credit card bills in the past. A credit score of 750 and above is considered good and banks feel confident while offering the loan to such applicants.
- Income: High income borrowers are more stable and hence the lenders get a satisfaction that the borrower will be able to repay the debt without any hassle. Though you will have to meet the minimum salary requirement set by the bank, a higher income will act as an added advantage.
- Your employer and nature of employment: Salaried professionals working with a large corporate or MNCs and government employees are preferred by the banks. Since lenders perceive that your job is stable and offers you a low interest rate.
- A healthy relationship with the bank: Loyalty is appreciated by banks and if you maintain a relationship with your bank for a considerable amount of time, you might get a lower interest rate on the personal loan.
- Defaults: If there are defaults in your credit profile, the borrower will either get a higher interest rate from the bank or the application will get rejected. Many of the banks prefer borrowers with no defaults in the past 12 months when it comes to approving a personal loan application.
Tips To Get Lowest Interest Rates on Personal Loans
Yes, the interest rate on your personal loan is decided by the banks but you can keep a few tips in mind to get the lowest possible interest rate. The tips are as follows:
- Maintain your credit score: As mentioned above, your credit score is a reflection of the financial decisions that you have taken in the past and the way you have handled them. A credit score of 750 and above is considered a good score and banks don’t hesitate to offer a lower interest rate to these borrowers as they seem to be reliable. In order to maintain your credit score, keep paying the EMIs on time and keep checking your credit report for any defaults.
- Compare and choose the right lender: In spite of having a bank account with a specific bank for years, do not ignore the offers you have from other banks. It is important to compare interest rates of various banks before finalizing your lender. Paisabazaar.com enables you to compare various personal loan options available to you and choose the most-suited option. Remember to read all the terms and conditions carefully to know about the hidden charges as you might get a lower interest rate but if there are hidden charges involved, you will end up paying heavy EMIs.
- Pay your existing debts, if any: The lenders also take your debt to income ratio (DTI) into consideration, which is calculated by adding your monthly debts and dividing their sum by your monthly in- hand income. If your DTI is higher, you may be not be considered a reliable borrower from the bank and your loan application may be rejected or a higher rate of interest may be offered. Before opting for another loan, try and pay some of your existing debts.
- Look for pre- approved offers: Many lenders on the basis of your financial history, offer pre- approved loan as per your repayment ability. When a pre- approved loan is offered by the bank, sometimes a lower interest rate is offered as the lender has already analyzed your financial capability.
- Work for a reputed organization: In case you are employed with a public sector organization or a reputed MNC, there are chances that you may be offered a lower rate of interest. So, in case your spouse works with such an organization, you can apply for the loan in his/her name to get a better rate of interest.
- Apply with a co- applicant: In case you have a credit score less than 750, lenders might approve your personal loan application but with a higher interest rate. In such a situation, you can apply for a personal loan with a co- applicant who has a good credit score, maybe your spouse or a parent. When you apply for a loan with a co- applicant, the lenders take into consideration the financial information of you and your co- applicant. This way, you may get a lower interest rate.
If you manage to get a personal loan with a low interest rate, you may save a significant sum of money over the loan tenure, which you can use to deal with various expenses. Also, your EMIs become lighter and you remain stress- free during the repayment period.