4 factors that affect your Personal Loan interest rates
Mr Verma from Kolkata, wanted to take a personal loan. But he was still wondering which lender to approach. That is when he heard his friend how he got a personal loan at a 12% interest rate. Encouraged by this super-low rate, Mr Verma approached the same bank. He met the personal loan eligibility criteria for the same amount and tenure. But to his shock, the bank quoted a much higher interest rate. Mr Verma could not understand how such a difference was possible. After all, he wanted an equal amount of loan to be paid back within the same tenure. Confused and angry, he went to his financial consultant. The consultant explained Mr Verma the reason behind the higher interest rate was his bad credit score. He then came to know how personal loan interest rates depend on many factors. Let us see what he learnt, as it is applicable for every borrower:
- The interest rate is directly proportional to your income
Mr Verma found out that his income played an important role in deciding the interest rate on his personal loan. The higher his income, the lower the rate he would be charged.
Income determines the repayment capacity of the borrower. A higher income means that the borrower can easily repay the loan. This is good for the lender. Thus, interest rates are lower for people who have a higher income. But they have to submit documents to prove this income.
- A good credit score rewards the borrower with lower premiums
The credit score shows the borrower’s credit rating. A low score is bad for the lender. A low score implies a higher chance of default. It creates problems in getting loan sanction. Some banks do give personal loans to borrowers with bad credit. But the rate of interest shoots up. Mr Verma had already learnt this the hard way.
- Nature of occupation is relevant
Mr Verma’s friend was salaried while Mr Verma was self-employed. Though self-employed individuals can get a loan even at an older age, the interest rate goes up. A salaried borrower in a reputable company has a fixed income. This ensures stable repayment. A self-employed borrower’s repayment capacity might falter due to problems in the business. So, self-employed individuals like Mr Verma present a default risk. The interest they are charged is higher. Salaried individuals, on the contrary, can enjoy lower rates. However, they have to be employed with a reputable firm.
- Existing relationship with the lender
Banks and other financial institutions allow their existing customers a lower rate of interest. You could have a fixed deposit account, savings account, or even another loan account with the institution. If you buy a personal loan from the same institution, you could avail a lower interest rate. That is because the lender has some idea about your financial standing.
A last word
Mr Verma’s credit score increased his personal loan interest rate. But he learnt about the factors that influenced it. Now you know these factors, too. This will help you get personal loans at low interest rates. You can also apply online for a loan. Check your eligibility, apply for the loan, and submit the documents required. Do all this with the click of a mouse. It is that simple!