Personal loans are one of the most preferred debt instruments that can help you meet all your financial obligations. These loans come with unrestricted end use, quick approvals, zero collateral, and easy disbursements.But one of the most important parameters that you must check before applying for an instant loan is the interest rate.
Since personal loans are unsecured loans, the interest rate levied on the loan is often higher than other loans like home loans or car loans. The interest rate levied on the loan is one of the most important factors in determining your loan affordability. It impacts your loan EMI, your choice of loan tenure and your loan amount.
Knowing the factors that influences your personal loan interest rates can help you secure a much affordable loan.
Factors Affecting Personal Loan Interest Rate
Financial experts advise you to examine different lenders when applying for a personal loan. This will help you pick the loan with the lowest rate to make your EMIs manageable. Before that, you must know the factors that can influence your interest rates.
1. Credit Score
Before approving your loan, lenders review your credit score to understand your credit history. Your credit score is a three-digit number assigned by a reputed credit agency based on your credit history. A high credit score signifies that you are responsible borrower. This reduces the lender’s total risk associated with your loan account.
That’s why it is important to check your credit score before applying for the loan. In case your credit score has suffered due to a past negligence, then you must take the necessary steps to improve your credit score. Closing your loan accounts on time, availing a mixed bag of credits, paying your EMI on time and keeping your credit utilization before 30% can help improve your credit score.
2. Monthly Income
Your monthly income plays a very crucial role in determining your loan interest rate. The higher your income the higher is your loan eligibility. Since, a high income indicates better loan repayment capability, it reduces the lender’s risk associated with your loan profile. Thus, they may offer you an instant loan at a lower interest rate.
Thus, it is important to mention all your income sources when applying for a personal loan. In addition to your salary, if you have additional income like rental income, income from investments, business income or any other income, then make sure to reveal it to your lender. This will increase your loan eligbility and may get you lower interest rates.
3. Repayment history
Your chances of getting a personal loan approved at reasonable interest rates are higher if you have a strong repayment record. Because of your consistency with payments, lenders feel confident about your repayment attitude. Thus, they may offer you the loan at a modest interest rate.
In addition to your repayment history, lenders will also consider your current ongoing debts. This includes your existing loan EMIs and credit card bills. You must keep your total monthly obligation less than 50% of your total provable monthly income. This will help you secure aninstant loan at a lower interest rate.
4. Your relationship with the lender
When applying for a personal loan, you must consider the lender with whom you have a pre-exisitng relation. This could be any relation, like having a savings account, salary account or prior loan account. Having a good relation with a lender can help you secure a new personal loan at reduced interest rate.
Availing a loan from an existing lender will also ease your loan process and make your paperwork simplified. This is because the lender already have the necessary details to approve your loan.They may also extend pre-approved loans at lower interest rates depending on your eligibility.
5. Your current employer
Your current employer also plays an important role in determining the interest rate levied on your instant loan.Most lenders offer low interest personal loans to people working in the government sector or in a reputed multinational company. This is because of the high income stability and regularity in salary guaranteed by such employers.
Lenders often offer pre-approved loans, line of credit or advanced salary loans to such individuals. That’s why, most people try to secure a job with a reputed employer.
Conclusion
Personal loans are popular among borrowers. However, the affordability of a personal loan is determined primarily by the interest rate. A high interest rate can increase your EMI burden and make the loan very costly. Though personal loans are known to have higher interest rates, these smart financing tips can help you avail one at the best interest rate.