A personal loan is an unsecured that can be availed to have funds for medical emergency, marriage, home renovation, debt consolidation, vacation, etc. Since it is a collateral- free loan, banks usually charge a higher rate of interest as compared to secured loans like education, car or home loans. The interest rates for personal loans start from 10.50% but varies from bank to bank and are offered to an individual according to his credit score, income, employment type, loan repayment history, etc.
Factors That Affect Personal Loan Interest Rate
- Credit Score: A credit score is basically a 3 digit summary of your credit history that acts as a record of how regular you have been with your EMIs and credit card bills in the past. Therefore, a healthy score indicates that you are disciplined with your repayments and hence the lenders don’t hesitate to offer you a lower interest rate
- Income: High income borrowers have a good monthly income 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. Also, you can combine your extra income (like rental income) with your salary to get a better deal
- Your employer and nature of employment: Salaried professionals working with a renowned organisation or government employees are preferred by the banks. As the 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 that is if you have a current or savings account with the bank or have been paying any existing loan on time, you might get a lower interest rate based on your disciplined financial behaviour
- Tenure: The tenure of a personal loan varies from 1 to 5 years. Therefore, if you choose a shorter tenure, the lender will get an impression that you have the ability to repay the loan on time and hence might offer you a low interest rate
Tips To Get Low Interest Rate on a Personal Loan
- Maintain your credit score: As mentioned above, your credit score is a reflection of your repayments that you have made in the past. If you have been disciplined with the repayments, you will hold a good credit score and hence the lender won’t hesitate to offer you a low interest rate. In case you have a low credit score, pay your EMIs and credit card bills on time in order to improve it and then apply for a loan
- Compare and choose the right lender: Even if you have an account with a specific bank for years, do check the offers you have from other banks. It is important to compare interest rates and other fees and charges of various banks at Paisabazaar to get the best deal on a personal loan
- 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 more than 50%, you may not be considered a reliable borrower by 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 to have a lower DTI ratio and a lower interest rate
- Look for pre- approved offers: Many lenders on the basis of your income, credit score, repayment history, etc. offer you a pre- approved loan. When bank comes with such an offer, you might be offered a lower interest rate as the bank has already analysed your repayment ability
- 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. This happens because working with a renowned organisation shows job stability and regular flow of income
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.