Personal Finance

5 Major Factors That Affect Your Personal Loan Interest Rate

Due to the financial instability induced by the COVID-19 pandemic, the demand for personal loans has significantly increased over the past two years.

To meet unexpected financial needs, personal loans are the best alternative to using savings. It enables you to arrange funds for a medical emergency, education, wedding, international travel, home renovation, car repairs, etc.

Factors Affecting Personal Loan Interest Rates

Fullerton India online personal loan can help you meet all your financial requirements without the need to touch your savings or investments.

Using an online platform, you can avail yourself of a quick and hassle-free application procedure. You can get the loan amount you need and repay it with affordable EMIs. However, in order to enjoy maximum benefits, there are several factors you may want to consider before applying for a loan.

Factors Affecting Personal Loan Interest Rates

One of the crucial factors that form an integral part of your loan application is your personal loan interest rate. Not all lenders offer the same rate of interest.

That is because each lender’s policy and eligibility criteria differ. However, factors that influence the rate of interest more or less remain the same. Here are the top five factors that can affect your loan interest rate.

Your Monthly Income

Irrespective of your nature of employment, your monthly income is an essential factor considered by the lenders before deciding your personal loan interest rate. As a rule of thumb, the higher your monthly income, the lower your interest rate.

Lenders consider high-earning borrowers credible, and due to higher repayment, they are considered a lower interest rate compared to borrowers with low monthly income. Having a higher income can also help you secure a better interest rate even if your credit score is lower than 750.

Your CIBIL Score

When it comes to deciding your personal loan interest rate, your credit score assumes a significant role. A credit score is a three-digit number assigned by the Credit Bureau of India.

It ranges between 300 and 900. Your credit score enables lenders to determine whether or not you will be able to repay the loan amount within the stipulated EMIs.

Your credit score is calculated based on five components – credit history, length of credit history, credit utilization, credit mix, and new credit. If you miss your EMI payments, it will hurt your credit score, reducing your chances of loan approval or even securing a lower interest rate.

Lenders consider a minimum CIBIL score of 750 to approve a loan application. It means that if you have a credit score of less than 750, your loan application can be rejected by the lender.

Some lenders do offer loans, provided you incur a higher interest rate. Also, if you get a credit score of more than 800, you may receive up to a 0.5% drop in your personal loan interest rate.

Your Employer’s Reputation

It is generally observed that the reputation of the borrower’s employer plays a deciding factor in an online personal loan interest rate. For instance, if you work for a multinational company known for paying high income to their employees, you will have more flexibility on your loan terms.

Lenders perceive employees of reputed companies as valuable and creditworthy. It means that these employees will be able to repay the loan amount without any delays and defaults. Therefore, if you are working for a reputed company, you will likely receive a lower interest rate compared with borrowers working for an ordinary company.

Your Relationship with the Lending Company

Another factor that goes into your online personal loan interest rate calculation is your current relationship with your lender. It is a common practice among lenders in India to offer extra benefits to loyal borrowers.

The reason is that lenders would like to maintain this mutually beneficial relationship with borrowers with whom they had a long and healthy professional relationship,

So, if you had opened a savings account or taken a loan from a specific lending company and cleared all your dues within a specific time, it means that you are a loyal customer of the lender. You can leverage your relationship with your lender to get a substantial concession on your personal loan interest rate.

Debt-to-Income Ratio

The debt to income ratio is a ratio calculated by dividing your monthly debt payments by your monthly income. It indicates the borrower’s ability to repay any futures they are applying for.

Having a higher debt to income ratio increases the burden of repayment on the borrower. Therefore, lenders offer a higher interest if you have a higher debt to income ratio than the percentage recommended.

An ideal debt to income ratio is between 21% and 35%. So, if it is more than 35%, you will struggle to get a lower interest rate on your loan. Your application may even get rejected if your debt to income ratio crosses 60%.

In Summary

You will need to assess and evaluate your needs and future income before taking an online personal loan. A golden piece of advice would be to compare different lenders’ offers and choose a loan that best serves your needs.

About the author

Rishabh Agarwal