A personal loan is one of the most feasible finance options to cover your monetary needs. It’s simple, easy and convenient to avail a personal loan or cash loan. And it is even easier to repay a personal loan with easy monthly EMIs. However,before availing a personal loan, there is one thing that you must check – the interest rate.The higher the interest, the higher will be the EMI and the higher will the cost of your loan. Hence, it is very important to understand the factors that influence your personal loan interest rates.
Read on to discover the factors that influence your personal loan interest rates.
Factors That Influence Personal Loan Interest Rates
- Base interest rates are set by the Reserve Bank of India
The Reserve Bank of India sets the basic rate of interest and almost all lenders treat this figure as the base lending rates. They will add their cost of capital, cost of business and a few percentage points on it for profit’s sake. This will become the rate of interest at which you will get a loan. Obviously, an online loan app has lower cost of business so their final interest rates are better than conventional lenders. If the Reserve Bank increases the base lending rate, the interest rate at which personal loans are offered will also go up. If Reserve Bank brings the rate down, market also pushes the rate down.
- Type and way of doing business of the lender
Most of the conventional lenders in Indian financial system still prefer the old way of doing business. They maintain offices in many cities and have armies of staff. Their traditional means of operation costs much more than the digitalized means used by Fintech companies. Thus, if you go for a traditional lender you can expect a slight high interest rate than those offered by the online loan apps.
- Your credit score
Since personal loan is an unsecured loan, your lender relies on your credit score to analyse your repayment behaviour. If you have a good credit score then that would mean that you are very responsible towards your payments. While a bad credit score means multiple lapses on payment, unclosed loan accounts or loan settlements. That’s why lenders offer loans at better interest rates to people with high credit score while people with poor credit score are either face loan rejected or they get it at a higher interest rate.
- Your job history
Many financial institutes offer better interest rates to government employees and corporate employees working in big MNCs. Also, people who have a stable job, who have been in the job for a long time, have higher chances of getting better interest rates. People who keep changing their jobs frequently are seen as unreliable borrowers and that’s why the lender might levy higher interest rates.
- Your employer’s brand
As already mentioned, many lenders offer better interest rates to employees working in government sector or MNCs. This is because of their high job security and they get their salary on time. People working in start-ups or as professionals, are often marked as risky borrowers. This is because of the job insecurity, delayed payments, higher chances of lay-offs and other issues.
- You have utilised too much credit
Along with your credit score, one important thing that the lenders consider from your credit report is how much of credit you have utilized. People who have utilised too much of their credit, are offered loans at higher interest rates because lenders may consider them risky borrowers. Further if you have utilised too much credit, you are also at a high risk of financial distress in case of income loss. While most people do consider their credit score as important factor, the credit utilisation aspect still remains relatively unknown to the general public.
The interest rate that the lender mentions in their advertisement is not the final interest rate that you have to settle for. If you have a strong portfolio and you can assure the lender of repayment then you can negotiate with the lender for a better interest rate. In addition to this, maintaining a good relation with a lender can also get you great deals on interest rates on loans. You can download an online loan app and avail small ticket loans that you can repay on time and without much burden. This will help you improve your credit score and establish a good relationship with the lender. So, even if you avail a higher amount the lender will have the trust and offer you the loan at a lower interest rate.