A Personal Loan is a saviour that helps us in times of unwanted financial situations. Be it a medical emergency, an urgent house repair or even a much-needed travel booking. A personal loan always comes in handy.
Interest rate is the essential factor in choosing the right personal loan. The interest rate decides the amount of equated monthly instalments or EMI that one needs to pay for their loan.
Here are the essential factors that affect the personal loan interest rates:
- Credit Score
The credit score is perhaps the most significant factor that decides the interest rate of a personal loan. A credit rating agency like CIBIL or PERFEOS assigns the credit score using factors like past repayments and loan history. The higher the credit score, the better the loan terms one can get from the financial institutions. Usually, a credit score of more than 700 is considered good. The score has a range between 300 to 850.
- Credit History
A financial institution needs to know about the repayment capability of the loan seeker. The credit history is a good study for the lenders to gauge the credit habits and repayment schedules. The lenders maintain the past credit history of their customers, whereas, for other customers, they refer to the detailed reports by the credit bureau or the bank statement of loan applicants.
The repayment capacity of an individual depends on their income. Usually, the lenders keep a limit of 40% to 50% of the monthly salary as the EMI. However, the lender will also keep in mind other loans that a person is running. Consistent growth in income over the years is an estimate of an applicant’s career graph. Thus, making income an indispensable factor for the personal loan interest rate.
A lot of applicants do not understand the value of location in availing of a personal loan. However, a personal loan in Bangalore will differ from a personal loan in Lucknow. The financial institutions understand that a person in metro cities like Bangalore will have different needs. For instance, a Bangalore applicant might use the personal loan in Bangalore for giving advance rent of 11 months which is a standard practice in Bangalore. Also, the lenders are more willing to lend to metro applicants due to factors like a higher salary and more data visibility.
A known brand or organisation provides stability to one’s career. The financial institutions give a preference to employees working in top corporations for approving the personal loan.
- Banking History
Banks offer a personal loan lower interest for their long-standing customers. Banks are known to offer pre-approved loans to customers with a good banking history. Banks have the data and are aware of income, existing loans and repayment capacity.
- Loan Size
The loan amount is also inversely proportional to the interest rate. The higher amount increases the risk for the lender, making them increase the interest rate.
- Loan Type
A secured loan attracts a lower interest rate, an unsecured loan such as a personal loan attracts a higher interest rate. Financial institutions minimise the risk by using interest rates as leverage.
- Loan Tenure
The higher loan tenure also increases the risk of a financial institution. Thus, they tend to increase the personal loan interest rate for a higher loan tenure.
LoansJagat helps individuals get the best interest rate on their loans. Applicants can compare the offers from top financial institutions for their personal loans in Bangalore or other cities across the country.