When taking out a loan, most people focus only on quick approval and disbursement. However, the interest rate plays a major role in deciding the total amount you repay over the loan term. Since personal loans are unsecured, lenders set interest rates based on their risk assessment. The same loan amount can attract different interest rates from different lenders.
To decide the rate, lenders assess the borrower’s personal profile and the type of Personal Loan. Understanding these factors in this blog can help you improve your eligibility, increase your chances of loan approval, and negotiate better interest rates and loan terms.
Top 5 Factors That Affect Your Personal Loan Interest Rate
Lenders assess multiple key factors before finalising the loan interest rate on a Personal Loan. These factors collectively shape the interest rate offered and influence the overall cost of borrowing.
1. Credit Score and Credit History
The credit score is one of the most important factors affecting the interest rate on a Personal Loan. A good credit rating demonstrates responsible borrowing and the prompt repayment of all past loans. Such customers represent a lower business risk to a lender.
In addition to a credit score, lenders evaluate an individual's credit history. This is the record of all past loans, including whether payments have been made on time.
Through consistent loan repayments, borrowers build greater lender confidence and secure better loan terms. Contrarily, a low credit rating indicates to a lender that there is greater business risk. Therefore, a lender would likely charge a higher interest rate to offset that risk or may decline to approve the loan altogether. One of the best ways to maintain a low-interest Personal Loan is to maintain a clean credit history.
2. Income Level and Repayment Capacity
Income is an important factor for lenders when determining fees. They assess the borrower's monthly income to determine their ability to repay and remain financially responsible over time. A borrower with steady monthly income demonstrates the ability to repay their loan on time. Most lenders require a minimum salary level to meet the Personal Loan eligibility criteria.
A borrower with a higher income can expect to qualify for a larger loan and often receive better interest rates. A consistent income level over time gives them confidence in the borrower's future cash flow.
When a borrower's income matches the monthly loan payment, the risk of default is lower. This increases the likelihood of securing a favourable loan term and paying less interest over the life of the loan.
3. Debt-to-income ratio and existing financial commitments
The ratio of debt to income is commonly referred to as a Debt-to-Income (DTI) ratio. The DTI ratio is used to assess an individual's ability to repay personal or business loans. The lower your DTI, the better off you are and the more flexibility you have in obtaining additional credit.
A borrower with multiple outstanding loans may find their interest rate is higher than that of someone without them. If your current loan amount is higher, you may be less able to repay it.
Therefore, creditors perceive that you carry greater risk because you already have certain financial obligations. Responsible management of existing liabilities helps a borrower maintain a healthy debt-to-income ratio. This provides borrowers with better opportunities to qualify for loans and secure more favourable interest rates.
4. Employment type and employment stability
This states that whether someone is employed and how long they have been employed affects their ability to obtain a loan or secure a lower loan rate. People who work for a company and have been in the same job for a long time are usually considered low-risk borrowers. These people are low risk as they are getting paid by their employer every payday. In addition to long-term employment, a steady income is viewed favourably by lenders.
In some cases, self-employed borrowers can still receive personal loans; however, lenders carefully examine their income patterns. In addition, lenders review a self-employed borrower's financial history and steady income before determining the interest rate. Borrowers with a long-term, stable employment history are typically offered better rates than those without one.
5. Relationship with the lenders
Your connection with financial institutions can significantly affect the interest rates you may receive on personal loans. Generally, borrowers with accounts at a particular bank or who have previously borrowed from that lender will receive favourable pricing. Trust is built through consistently paying off loans as agreed.
Therefore, lenders may send pre-approved loan offers to consumers with excellent repayment histories at competitive rates. Additionally, many lenders will offer more favourable loan terms based solely on an established relationship with the customer. Having a good relationship with lenders enables borrowers to receive their loans more quickly.
Read Also: Key Differences Between Fixed and Floating Personal Loan Interest Rates
To Conclude
Several factors determine the interest rate on a Personal Loan. These factors include credit scores, income levels, debt-to-income ratios, employment stability, and relationships with lenders. Other factors include the principal amount, loan tenure, repayment terms, and any associated fees.
You can increase your chances of getting a Personal Loan approved by understanding how these factors work. With the right guidance, you can choose a Personal Loan that meets your financial needs and remains manageable throughout the repayment period. With Poonawalla Fincorp's Personal Loan, you can get attractive interest rates and quick loan disbursement. Connect with us today for more details!
FAQs
What affects Personal Loan interest rates the most?
Credit score and repayment history have the highest impact. Income and existing financial commitments also play an important role.
Will the loan tenure affect the applicable interest rate on my loan?
Loan tenure does not always change the applicable interest rate. However, a longer loan tenure increases the total interest payable over the life of the loan.
Does making a partial payment on a Personal Loan reduce the total interest I will pay?
Yes, making a part-prepayment reduces the outstanding principal, which can lower the total interest payable, subject to the lender’s prepayment terms and applicable charges.
Are processing fees to be included in the calculation of the Personal Loan's interest rate?
Processing fees are in addition to the interest on the Personal Loan and increase the overall cost of borrowing.
What may borrowers do to obtain lower interest rates on a Personal Loan?
Borrowers can obtain lower interest rates on Personal Loans by maintaining a good credit history and reducing their debt-to-income ratio.
We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Loan disbursal is at the sole discretion of Poonawalla Fincorp.
*Terms and Conditions apply