Personal loans are unsecured loans and are very easy to get. It can be a great option for support during an emergency or other necessity that comes into life. Nowadays, even paperless loans are also available where you can choose your vendor and get the money to your account directly without any physical documentation. But no matter how easy it goes; the affordability of a personal loan is based on the interest rate it comes with.
If you are planning for a loan from one or multiple vendors, you must check out the factors determining the interest rate. Continue reading the post to know what determines the interest rate of your personal loan.
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Credit Score
The borrower’s credit score works as a validation of how the individual has performed with the payment of other loans and credit card bills. Every time the person makes a timely payment adds to the credit score. On the contrary, missing on payments brings it down potentially.
The CIBIL score ranges between 300-900, and a score of more than 750 is considered a perfect fit for loans. If the applicant has an impressive credit score, chances are high of getting a better interest rate and vice versa.
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Monthly Income
The income of the individual applying for the loan also plays an important role in determining the interest rate for personal loans. In records, people with high disposable income have higher repayment capacity compared to those with lower incomes.
As far as common practice is considered in the lending sector, people with high and stable incomes tend to get lower interest rates on loans. But this is not the scenario with borrowers with minimum or lower income levels.
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Past Lending History
The past repayment records of the borrower are checked thoroughly before any lender gives final approval and before deciding the interest rate for a personal loan. If the lending institution finds you quite disciplined with the repayment terms, you are most likely to get a low-interest rate on a loan.
In most cases, banks or other lenders choose to lend money to those who haven’t defaulted in the last 12 months. In case of loan defaulters, the application is rejected or charged a hefty interest rate.
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Relationship with the Lender
If the borrower had some previous transaction with the lender, the individual might get an attractive interest rate for personal loans. This happens because lenders are most likely to trust borrowers with good financial records on file. The lenders also love to retain customers those who have past relationships.
Additionally, past association with the lender can also fasten the approval process. If there are multiple offers from different lenders, make sure to use the EMI calculator to know the most suitable offer.
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Existing Liabilities
In case you already have other existing loans like education or home loans, the lender wants to ensure that you have adequate money every month to repay the EMIs for SBI personal loan or from other lending institutions. Having too many liabilities potentially increases the risk of loan default and, eventually, a higher interest rate.
So now that you know the factors you need to keep in mind that determine the interest rate for personal loans make sure to keep them accountable to get the best interest rate. Ensure all the factors work in your favour before applying for a personal loan.
