Factors affecting personal loan interest rates

The financial temperament of the country is increasingly becoming somber with each passing day. Situations of cash crunch have become a thing of the present as citizens of the nation continue to grapple with high interest rates, surcharges and more.

A personal loan is essentially an unsecured loan which the borrower repays through Equated Monthly Instalments, popularly known as EMIs to the lender (bank). If you are applying for a personal loan, there are certain things that would require your attention to help you make the most of your loan.

You also need to keep in mind that a higher interest rate indicates a higher EMI and vice versa. Individual lenders and banks do not offer same interest rates to every individual. There are multiple factors that affect this decision. The following aspects are bound to affect your interest rates:

●Your CIBIL rating: The Credit Information Bureau (India) Limited score is essentially a 3-digit summary of your entire credit history. When applying for a loan, banks and moneylenders conduct extensive research on the person’s CIBIL score to shrink the risks of non-payments. If you have a brilliant credit history (a score above 800), you will most likely get a 0.25% reduction in your loan interest rate.

●The reputation of your organisation: If you work for a comparatively renowned organisation, you are more likely to get a lower personal loan interest rate. This often happens because banks consider employees working in renowned companies to have a fairly stable career. Hence, these individuals automatically become more susceptible to making regular repayments.

●Your personal income: Your eligibility for a personal loan is directly dependent on your annual income. Since personal loans are unsecured loans, there is no involvement of collaterals against the same. A high and stable personal income is an assurance to the lender that the debt will be paid off in a hassle-free manner. Therefore, personal loan applicants are required to meet the minimum salary requirements provided by banks (yearly). Lenders also tend to reject applications if the individual is incapable of submitting proofs of a steady flow of remuneration.

●Your reputation with the bank: Banks prefer giving loans to individuals who share a cordial relationship with them. These individuals are guaranteed to get handsome personal loan interest rates. If you have been a loyal customer to a certain bank, someone who has a history of making structured payments, then the bank would much rather retain this relationship than lose you to a rival entity (bank) altogether. You will most definitely benefit in such a situation.

Parallelism between personal loans and car loans

The two concepts are not very different where policies and basic features are concerned. A good credit score (CIBIL ranking), a steady income, and cordial relations with the bank are pretty much all that is required to attain an attractive interest rate against a car loan. Your car loan eligibility will be determined solely by the aforementioned conditions. However, in the case of a car loan, the higher your down-payment amount is, the lower will be your car loan cost.

Financial advisors often counsel individuals taking car loans to have a low debt-to-income ratio since this ratio indicates your capacity to repay the debt.

Make use of a car loan EMI calculator to determine your loan tenure and loan amount. Enter the loan amount, tenure, interest rate and the processing fee into the EMI calculator. This, in turn, gives you immediate results along with an illustration consisting of monthly payments, gross payments, and reduction of the principal amount.

Can you improve on the existing factors and prerequisites?

Yes, of course, you can. Following are some of the ways through which you can ensure you land attractive interest rates the next time you apply for a personal loan, a car loan or a home loan:

●Banks and moneylenders would much rather go into business with someone who has been in a particular organisation for a reasonably long period of time.

●Ensure that you maintain a brilliant score. Quit delaying your debt remittances, get out of the habit of holding up credit card payments, do not ever max out your credit limit, and finally, refrain from getting too many credit cards or loans for that matter.

●Building a strong rapport with bank managers and account heads not only helps in acquiring a handsome interest rate, but also pays off in times of need.

●Additionally, just like job-hopping, residence hopping is also looked down upon by moneylenders. Hence, try to stick to your current residence for the period that you are applying for the loan, in order to get a plausible interest rate.

The next time you apply for a personal loan, ensure all these prerequisites are met so that you land an appealing interest rate.