Just about every bank in India offers personal loans to its customers at varied interest rates. These rates are very important as they often determine how heavy the loan is going to be on the pocket of the borrower.
Interest rates are usually a percentage of the total principal amount borrowed by a bank’s customer.
What are personal loans?
Personal loans are unsecured loans that allow individuals to borrow a significant amount of money for various purposes, such as debt consolidation, home renovations, medical expenses or vacations.
Unlike secured loans, personal loans do not require collateral, making them accessible to borrowers without substantial assets.
Which factors affect interest rate on personal loan?
The following factors play a role in determining the interest rate at which you can avail a personal loan:
- Credit history
- Stable income
- Relationship with lender
- Employment type
- Loan default history
Credit history: The credit history of a borrower is often decided based on their credit score. It is an extremely important metric as it determines how disciplined a borrower is with respect to repayments of different types of loans.
A stronger, or higher, credit score makes you a more attractive borrower for banks and credit institutions, which in turn makes you eligible for lower interest rates on personal loans. CIBIL is the agency which usually provides credit scores.
Stable income: A consistent source of fixed income also makes you a more attractive borrower. This is simply because a stable income objectively raises the chances of timely repayments.
Maintaining a low debt-to-income ratio by managing existing debts and avoiding excessive credit card usage can also improve your chances of receiving better rates.
Relationship with lender: Your existing relationship with the bank can influence the interest rate offered. If you are a loyal customer with a history of on-time payments, you may be able to negotiate more favourable terms. A proven track record with a lender can lead to lower interest rates and better loan conditions.
Employment type: Government employees often receive personal loan approvals easily because of the stability and security of their jobs. They receive lower interest rates for the same reason.
Salaried employees are next in line, followed lastly by business persons. This is because though business persons have the potential to earn significantly higher amounts of money each month, their earnings are not entirely guaranteed.
Loan default history: A poor loan repayment history or previous defaults can significantly harm your credit score. A lower credit score typically results in higher interest rates or even denial of loan applications. Maintaining an excellent repayment record, free from defaults, is crucial for securing favourable loan terms.
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