What Are The Factors Affecting Personal Loan Interest Rates?

by Arjit Chalmela Finance Student

Nowadays, personal loans get disbursed immediately by banks and NBFCs. You can apply for the loan in the morning, and the amount gets disbursed by evening. You need not visit the bank personally for application as the process gets done online with minimal documentation. Fill the form, attach the necessary documents, and send the application. However, it is the lender who decides the loan amount and interest rates.

But thanks to the online process, you can make personal loan interest rate comparison on aggregator websites. Interest rate gets determined by several factors, which are –

Monthly income

One of the most crucial factors during personal loan application is your monthly salary. This is your in-hand income after the necessary deductions. According to the industry trends, those who earn around INR 50,000 are charged an interest of 16 per cent to 20 per cent. If you fall under INR 50,000 to INR 1 lakh bracket, you are charged an interest of 14 per cent to 16 per cent. If the income exceeds INR 1 lakh, get charged around 12 per cent per annum.

Employment status:

Your employment status is also essential for banks. It includes the period for which you are employed and the company reputation. The personal loan interest rate charged depends on the reputation of the organisation. Lenders believe that employees of reputed organisations have a stable career and higher chances of repaying the loan. If you are employed with a renowned organisation for over three years, you may be quoted lower rates.

Relationship with the lender:Your rapport with the lender also determines the interest rates. Your chance of getting the loan at lower rates increases if you have an existing relationship with the bank. Open fixed deposits or maintain a savings account with an adequate balance, it works in your favour. Your loyalty with the lender acts as leverage, enabling negotiation of interest rates since they do not want to lose on the business.

Credit score:

The moment you apply for the personal loan, you need to furnish some necessary documents to the lender. One of them is the credit score. It offers the lender insight into your repayment behaviour. Lenders gauge how often you take the loan, whether you have defaulted earlier, credit limit utilisation, and timely repayment of bills. If you exceed 750 scores, you get lower rates.

Amount and repayment:

If the documents, credit score, and relationship with the lender is in place, the personal loan interest rate gets affected owing to two factors – amount and tenure. The higher the amount, the higher the repayment and higher will the interest rates. Conversely, low principal amount and short repayment result in lower rates.