Personal loans have gained popularity in the last few years and become a customer favourite owing to their easy disbursal process, minimal documentation, and speedy approval rates. Interest rates play a crucial role in any type of loan and decide the total cost of borrowing. Unlike other loans like education loans, home loans that have fixed rates of interest associated with them, the rate of interest charged on a personal loan varies from lender to lender and person to person. Generally, the interest rate on personal loans is higher than other loans and start from 11% and can range up to 24% depending on several borrower-lender dynamics. Thus, different borrowers can get different interest rates from the same lender. This is because personal loans are unsecured loans and lenders are at more risk without any collateral or security at their disposal.
Important factors governing personal loan interest rates. Source: BajajFinserv
In the past few years, people have resorted to the personal loan EMI calculator to check personal loan EMI online. There are a few factors that affect personal loan interest rates and must be taken into consideration:
- Repayment history:
The credit score gives an insight into the repayment history of an individual and is one of the most important factors determining the interest rates to be charged on your loan, which cannot be computed by a personal loan EMI calculator since it differs from individual to individual. Banks and other lending institutions obtain your credit score from any one of the four Reserved Bank of India (RBI) recognized bureaus, namely the TransUnion CIBIL, Experian, Equifax and CRIF Highmark. Your credit score contains all your validation of your past borrowings and is an indicator of creditworthiness. A credit score between 750 and 900 is considered good, and the closer it is to 900, the lesser your interest rates are. Thus, one must try to keep his/her repayment slate impressive.
- Individual negotiation skills:
A long-time permanent account holder of a bank is considered as an esteemed customer of the bank. Also, if you have maintained a good relationship with the manager and bank staff, then you are in the position to negotiate with the bank on interest rates, processing fees, etc. depending on your negotiation skills, the banks may agree on reduced interest rates, or special offers exclusively for you. It is quite possible to get favourable deals which later makes it way into your personal loan EMI calculator.
The income of an applicant is one of the key factors your bank or lending institution takes into account for deciding your loan eligibility as well as personal loan interest rates. A high-salaried individual is in a better position to pay back the loan amount and is more likely to be charged a lower rate of interest and vice versa. Thus, according to lenders, the income of an individual is directly proportional to his loan repaying capability.
- Employer’s reputation:
The reputation of your employer you work with also plays an important role in determining your loan interest rate. If you are employed with a renowned and stable organization, the lending institution charges a lower rate of interest on your loan since it considers employees of such organizations to be leading a stable career with stable income. Similarly, while working in a small company or startup, the interest rate component in your personal loan EMI calculator shoots up.
- Tenure period and loan amount:
Factors such as tenure period and loan amount are inversely proportional to the personal loan interest rate and vice versa. Higher the loan amount and tenure, lower will be the interest rate.
The age of the loan applicant is an important and elusive factor impacting the interest rate provided by the loan provider. Individuals who are nearing retirement may be charged a higher rate of interest by some banks.
- Debt to income ratio:
One may have a handsome income and maybe working with a reputed company as well, but you have many loans pending against you. The debt-to-income ratio is the sum of your debts divided by your gross income. Most instalment loans or EMIs and credit lines such as credit cards and mortgage are included in your debt-to-income ratio calculations. Most lenders prefer debt-to-income ratios at or below around 43% with a preference for lower ratios.
Every lender follows its own set of loan origination process and litmus factors for determining the interest rates while calculating EMI using the personal loan EMI calculator. Seemingly trivial differences in borrower financial records and history may lead to noticeable changes in loan interest rates meted out to them. Now that you know the seen and unseen factors affecting personal loan interest rates, check for the above-mentioned points before you apply with as many lenders as possible to reach the most viable deal. Doing some research before applying for a personal loan will help you to get optimum benefits. Also, do not forget to use a personal loan EMI calculator in order to assess your repayment ability and avoid any future financial stress.