4 Important Factors That Affect Personal Loan Interest Rates

When it relates to personal loans for short-term financial needs, a couple of key factors come into force, such as interest rates, loan tenure, loan amount, eligibility, borrower type, credit score, and so on. However, while applying for a personal loan, we focus solely on the interest rate, which has its own set of influencing factors that most borrowers are unaware of. As the personal loan interest rate charged by your lender is determined by a variety of factors, you must know the key factors that influence your loan rate before opting for it.

• Income criteria

One of the criteria that determine whether you can receive a reasonable rate of interest on a personal loan is your income. Your income if it is higher and guaranteed, then whether self-employed or salaried, it is more likely you can get your loan amount at the cheapest rates. This indicates that the higher your income, the lower the interest rate you will get on your loan, and vice versa. In order to verify your level of income, your lender may ask for a copy of your payslip or your income details in order to process your loan application. However, borrowers should keep in mind that banks require minimum income criteria for both salaried and non-salaried individuals, which they should check before applying for a personal loan.

• Credit score

A credit score is nothing but a three-digit numerical ranking assigned by the Credit Rating Agency based on your credit repayment behaviour. For approving a personal loan application, a lender would check your CIBIL score to discover more about your creditworthiness. The credit bureaus keep track of your credit history, which is the most essential aspect taken into consideration when processing your personal loan application. A high credit score indicates that you will be able to handle the loan efficiently and reimburse it promptly. Lenders consider a stable CIBIL score of more than 750 to be good, and maintaining this score can also help you get a personal loan at a cheaper interest rate. While determining your personal loan interest rate, your repayment history for the last 12 months may be reviewed apart from your credit score. 

• Employment type

Self-employed and salaried persons can apply for a personal loan and because personal loans are mainly unsecured loans, lenders generally require a consistent source of income to ensure your loan repayment eligibility. Regardless of whether you have a decent CIBIL score, lenders also analyse your salary and employment type. It is important to note that, even if you have a strong credit score, your employment will play an important role in assessing your personal loan interest rates. For example, most banks provide lower loan rates to salaried individuals than to non-salaried ones. On the other hand, most banks give a specific interest rate to a customer based on categories such as a male or female borrower, asset category, and location.

• Loan tenure

Before making an informed decision to apply for a personal loan, make sure that you pick your loan tenure carefully, since the tenure you choose will impact the relevant interest rates. Banks often provide lower interest rates on personal loans with a tenure of 36 months but provide higher interest rates for loan terms of more than 36 months. In addition to this, an additional concession in the relevant rate of interest to employees of institutions/corporates with an