5 Factors Affecting Personal Loan Interest Rates

Personal loans are the most reliable when you need money or funds. They often are the last resort but work well when you need to arrange for emergency funds. Private personal loans are borrowed from banks, individual lenders, and financial institutions and are unsecured and easy to apply.

You can use them for personal reasons, including

  • Emergencies
  • Vacation
  • Education
  • Wedding
  • Home renovation
  • Medical purposes

The personal loan interest rates are higher than secured loans and may vary depending on the borrower’s eligibility. Hence, it would be best to consider all the factors that can affect the interest you will pay on the loan.

What Makes Personal Loan Interest Rates Important?

Factors Affecting Personal Loan Interest

The interest rate is the additional amount you pay to borrow and use money. It is calculated based on the principal amount. While seeking a loan, you need to consider which bank provides the lowest average personal loan interest because even a difference of 0.5% can significantly affect the total amount you repay.

5 Major Factors Affecting Personal Loan Interest Rate

Let’s understand what factors determine the interest rate on loans.

Income

Your income shows your capability to repay the borrowed amount. Therefore, higher income often means a lower interest rate. Your well-paid job shows lenders that you are a reliable applicant, and there is a lesser risk of defaulting on your loan repayment.

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Also, your employers play a crucial role in deciding interest rates. Employees of reputed firms show steady and assured jobs, which shows that you will repay the amount within the stipulated time.

Credit score

Another factor that banks take into account while processing a loan application is the credit score. Applicants’ CIBIL scores and credit reports provide details regarding their past credit behaviour and defaults.

Credit bureaus calculate scores based on factors such as credit mix, payment history, debt owed, and new credit. To assess one’s ability to repay, lenders meticulously examine this report. A higher score shows the credibility of borrowers, who may get lower or standard interest rates on personal loans and the best deals. Any score below 750-700 can result in rejection of the loan application.

Repayment discipline

A good repayment pattern will work well for you as it assures lenders that your credit profile is low-risk. Moreover, it shows your financial discipline, which can get you competitive interest rates from lenders. However, if you have been a defaulter in the past, chances are either your application will not be approved, or you will have to pay higher interest.

You can plan seamless repayment through a personal loan calculator, which computes EMIs for different loans. Evaluate if it aligns with your budget or not, and plan your monthly loan repayment.

Negotiate Skills of Borrowers

Most of us usually prefer one bank for all services, whether seeking a loan or opening a savings account. Long-term association with the same bank can fetch attractive deals and interest rates. If you have maintained a good relationship with one particular bank, you will have some leverage and can request a favourable interest rate, fees, etc.

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Based on your negotiation skills, banks can offer you a low-interest rate on your loan. Yes, you might not get the lowest rates, but they might reduce it to a certain extent. We are sure they don’t want to lose out on a loyal customer.

The economic climate and other market factors

Many might not know this, but repo rates, inflation, recession, and other economic factors affect interest rates. During inflation, lenders charge a higher interest rate on personal loans than during the recession. Moreover, lower repo rates also lead to lower interest rates.

The repo rate is what banks pay to RBI for borrowing money, so it directly impacts personal loan interest. You can hardly control these external factors but, if possible, prefer taking a loan during a low-interest period.

How to Calculate Personal Loan Interest?

To determine what is the average personal loan interest rate, use this formula:

  • Calculate EMI, which is equal to P x R x (1+ROI)^N / [(1+ROI)^N-1]

Here,

  • P- Principal loan amount
  • N- Loan tenure in months
  • ROI- Monthly rate of interest, which is
  • Annual Rate of Interest/12/100

We are sure that using this easy method, you will be able to find out the interest rate on the loan.

To Sum Up!

A personal loan can save your day when you need urgent funds. When taking out a loan, you must consider key factors influencing the interest rate. Compare interest rates of different banks and read all terms & conditions carefully before applying.

Also, remember that the factors discussed above are general, but not all personal loans are given based on them. Several convenient online fintech platforms offer private personal loans to salaried and self-employed individuals at flexible terms.

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Some even provide loans to those new to the credit score game – you must know your needs and update yourself with information on such lenders.

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Shashank Modi is a content marketer who works at KreditBee - India's leading FinTech platform that provides personal loans for salaried and self-employed individuals.

Shashank writes to empower his readers so they can take control of their finances and live their lives without worrying about money constantly. His ultimate goal is to write a book to teach kids about finance and budgeting.
Shashank Modi
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About Shashank Modi

Shashank Modi is a content marketer who works at KreditBee - India's leading FinTech platform that provides personal loans for salaried and self-employed individuals. Shashank writes to empower his readers so they can take control of their finances and live their lives without worrying about money constantly. His ultimate goal is to write a book to teach kids about finance and budgeting.

View all posts by Shashank Modi →

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