To best understand what factors determine the Personal Loan you get, you have to keep in mind the other characteristics of this type of loan. Starting with the application process and running through the Personal Loan eligibility criteria of banks and NBFCs are vital when looking for the best options in the market.
What is a Personal Loan?
A Personal Loan is a financial solution that can be used for almost any purpose. Personal loan for home improvement jobs to funding a wedding, you can avail a Personal Loan to meet any expenses you please. Since a majority of Personal Loans are unsecured, they come with a higher rate of interest than other loan options. To ensure you get the best interest rates in the market, you need to know the factors involved in calculating interest rates.
Factors that affect loan interest rates
- Credit scores
When it comes to securing a loan, and a decent interest rate, your credit score is crucial. Generally, the higher the credit score, the lower will be your rate of interest. As your credit score is determined after considering payment history, financial standing, and overall financial stability, it serves as a good indicator of your repayment capability. A higher interest rate is usually enforced when the lender sees potential bad debt arising from the loan, while a lower interest rate is based off the creditworthiness of the borrower.
Your income and your Personal Loan interest rate are inversely proportional. If you earn a higher monthly income, then you will be able to pull in a lower rate of interest. For instance, if your monthly salary is Rs.35,000, you might be liable to pay an interest rate of anywhere between 16% to 20% p.a. But, if your salary is going into 6 digits every month, there is a good chance those rates will be slashed to around 11.5% or 12.5%. Also, the exact interest range would depend on the bank or NBFC you choose.
When it comes to employment, there are two categories to look at—salaried and self-employed. If you work for a big company or a corporation, the reputation they have will be called to question when it comes to your Personal Loan. If they have a history of ups and downs, then your approval might be in jeopardy. If you have a good company backing your employment status, you won’t have to worry.
When it comes to running your own business, more often than not, banks and NBFCs will sanction your loan, regardless of your age, as long as you provide valid paperwork related to your business.
- Relationship with lender
If you have a relationship with your lender, which predates the application for your loan, then you getting a better interest rate becomes much more possible. Banks and NBFCs take into consideration the relationship you have with them when deciding the terms of loans.
By keeping these factors in mind, you will be able to negotiate better interest rates for your Personal Loan. Also, keep in mind, that a loan interest calculator will be able to give you a fair estimate of the interest you will be liable to pay, thus helping you plan your finances better.