A personal loan is the easiest type of loan to avail. That is because it is an unsecured loan. It means you do not need a collateral or an asset to pledge for the loan. But, interest rates on personal loans tend to be higher than on secured loans. There are many factors that affect personal loan interest rates. Here is an infographic explaining the factors responsible for personal loan interest rates:
Factors Related to You
- Your Income Level:Your income level determines the interest rate and the quantum of the loan. Lenders want to give loans to individuals with a higher repayment capacity. Set your goals appropriately. If you want a higher loan and low interest rate, you must manage your finances well. You may want to rethink your monthly expenses and save more money at the end of each month. A bank usually looks at the balance that remains after you account for your monthly expenses. If they see a regular surplus, you will get the loan on favorable terms.
- Your Credit History and Credit Score:Your credit history and score will be subject to scrutiny by the lender. Lenders do this to determine your creditworthiness. It is a numeric reflection of your repayment history and capacity. Suppose your credit score is 700 or more. Then your chances of receiving a low interest rate are better. But suppose you have a poor credit score. Then the lender would be wary of issuing a personal loan. Even if you get a personal loan, you may have to pay a high interest rate.
- Your Employer:Lenders classify organizations under different categories. These include CAT A, CAT B, CAT C, and CAT D. CAT A is a list of India’s top 1,000 companies. CAT B is a list of reputed multi-national corporations, among others. The employees of CAT A and CAT B organisations receive low interest rates. This also applies to employees of these companies whose salaries are not high. They still enjoy low interest rates on their personal loans.
- Your Relationship with the Lender:You may have an ongoing positive relationship with the lender. In that case, you are more likely to receive a good deal on the personal loan. Lenders offer special rates and processing fees to valued customers.
- Your Negotiation Skills:Are you an existing customer of the lender? Then you can negotiate for your preferred schemes. But the success of these discussions will come down to your negotiation skills.
Other Influential Factors
- Bank Rate: The bank rate is the rate at which the Reserve Bank of India (RBI) lends money to commercial banks. Banks earn their profits by charging higher interest rates than what the RBI charges. When the RBI increases interest rates, retail lenders follow suit.
- Repo Rate: The RBI serves as the lender to commercial banks. It lends funds to these banks at a certain rate. This is the repo or repurchase rate. The RBI may reduce the rate when there is not enough money in circulation. It is a short-term loan against securities provided to banks by the RBI. But what happens when the RBI increases its repo rate? Commercial financial institutions increase their interest rates too. When the repo rate falls, it leads to a reduction in the floating interest rate on loans. There is no effect on fixed interest rate loans.
It is advisable to apply for a personal loan with your regular lender. If you have a bad credit score, try your luck with a non-banking financial company (NBFC). They are less stringent about credit scores. Always compare the interest rates of different lenders before settling on any loan. This will help you to get the lowest interest rate and the best deal.