There would be times in your life when you may need additional funds for any personal or professional requirements. It can be a wedding in the family, expenses for higher education, any medical emergency, or unforeseen expense. The fact isthat life is uncertain, and you may need some funds as a loan to meet your needs.
A personal loan is one of the most popular mediums for taking funds for any goal that you may set for yourself. As you can get funds at an affordable rate of interest with quick processing and disbursal, it is one of the most preferred routes for securing additional funds.
The personal loan interest rate varies from lender to lender. It can start from under 10% to as high as over 35%. Apart from the lender policies, there are several factors on the consumer's end that also affect the rate of interest on a personal loan.
While you cannot control the policies of the lender, you take action on factors that are in your control. As you do not need any collateral for taking a personal loan, there are elements like credit score, income, and a few other parameters that are adjudged by the lender to ascertain the rate of interest to be charged from the borrower.
As they say, you can only improve once you are aware of the areas that need improvement. These areas listed below are critical for ensuring that you can take a personal loan at the best possible rate.
For context, a loan of Rs. 100,000 at a rate of interest of 11% for a tenure of 60 months would attract an interest of Rs. 30,455. However, if the rate of interest is increased to 15% for the same tenure and loan amount, the interest amount would increase to Rs. 42,740. As you can notice, there is a difference of over Rs. 12,000 between the two scenarios. If you can get a personal loan at a lower interest rate, you would be able to keep your overall interest outgo low. You can check the difference of a lower interest rate on a personal loan using any personal loan EMI calculator.
Here are the top 5 factors that affect your personal loan interest rate:
1. Credit score
Your credit score is one of the most important factors when it comes to taking a personal loan. A credit score is a three-digit number ranging from 300 to 900, with 300 being the lowest end and 900 the highest. After your personal loan application is submitted, the lender checks your credit profile and credit score from one of the four credit bureaus - CIBIL, Equifax, Experian, and Highmark. This helps the lender to understand your past borrowing behavior, the current level of debt and how responsibly have you repaid the debt to the lender in the past.
In other words, the credit score helps the lender assess the level of risk that exists in extending a personal loan to you. The credit score also helps in understanding the kind of interest rate you would be charged for the personal loan. The higher the credit score, the better your chances are to get a personal loan at a lower rate of interest.
For perspective, a score above 750 is considered good. Some lenders even consider a score above 700 as good.
As a personal loan does not require any collateral from the borrower, the lender assesses the maximum amount of loan that a borrower can get based on the profile. One of the most important components in this process is the income level of the borrower.
From a lender’s viewpoint, you can only repay the loan amount if you have a sustained income cycle. The lenders get an idea about the repayment capacity of the borrower by looking at the income. A higher income can help you get a personal loan at an affordable rate.Your income is one of the critical components as the lenders look at your personal loan eligibility details.
3. Debt-to-income ratio
The debt-to-income ratio is the level of debt that you have taken in the proportion of your income. Lenders prefer that you keep your debt-to-income ratio below 40-50% of your income level.
For instance, you have a monthly income of Rs. 50,000 and have already taken a home loan that attracts a monthly EMI of Rs. 25,000.The debt-to-income ratio is already at 50% and lenders may hesitate or may only extend a personal loan to you at a higher rate of interest.
It is better to keep the debt-to-income ratio in control so that lenders can offer you a personal loan at an affordable interest rate.
In addition to the income details, lenders also check your employment status, years of experience, and the kind of company you are working for. Depending on if you are working full-time, part-time, or as a consultant, it will impact the rate of interest.
Lenders prefer borrowers who are working in established companies with a strong track record so that the risk of default in repayment can be minimized. Even if you are a well-established professional in popular professions like doctors, lawyers, chartered accountants, architects, etc, you would be able to get a personal loan at a lower rate of interest.
5. Relationship and history with the lenders
If you have a good history with the lender and have been able to repay your loan without any hassles in the past, it also plays a role in your personal loan process. You may even receive a pre-approved personal loan offer from the lender based on your previous transaction.
As the lender wouldn’t want to lose a good customer like you to any competitor, you may be able to get a lower rate of interest.
These are the top 5 factors that affect your personal loan interest rate. Poonawalla Fincorp offers personal loans at an interest rate starting from 9.99% with a low processing fee and zero hidden charges. You can get a personal loan online with Poonawalla Fincorp and experience best-in-class doorstep service.
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