A personal loan is one of the most preferred types of loans for borrowers. This is because unlike a home loan or education loan, a personal loan does not restrict the borrower when it comes to the usage of funds. The loan amount can be used for any personal expense. However, some borrowers are worried about struggling to repay their personal loans if they get stuck with high interest rates.
This should not be a problem if the borrower is aware of how financial institutions set personal loan interest rates. So, take a look at the major factors that affect a borrower’s personal loan interest rate:
- Relationship with the lender
It is always better to have an existing relationship with the lender when it comes to applying for a loan. When a loan applicant already has an account with the lender, it is easier for the lender to evaluate the financial responsibility of the applicant. This is why it is more likely for an applicant to get a lower interest rate from a lender with whom they are already an existing customer.
- Credit record
An individual thinking about applying for a loan needs to be very particular about their credit score. This is because lenders take their applicant’s credit records into account before approving their personal loan applications. A good credit score can also fetch an applicant a lower personal loan interest rate. Ideally, any applicant should maintain a credit score above 750 in order to get offered a low personal loan interest rate.
- Employer’s reputation
Even the company that an applicant works for can influence the interest rate of their personal loan. If the applicant works for a reputed company and has a steady employment record, this reduces the lender’s risk as it establishes the applicant’s financial responsibility. This is why lenders often offer lower personal loan interest rates to borrowers who work for well-known organisations.
- Loan repayment history
Experts always advise borrowers to pay back all their loans on time without any delays. This is because lenders always check the applicant’s previous loan repayment history. If the applicant has records of defaulting on their loans, they could get stuck with a high interest rate. This is why it is important to clear all EMI payments on time.
- Monthly income
An applicant’s monthly income is a crucial factor that determines their personal loan eligibility. Any lender will check the monthly income of their applicants to understand whether they would be able to afford the loan they are applying for.
These are some of the main factors that financial institutions take into consideration while setting personal loan interest rates. To get a good personal loan rate, it is very important to keep these points in mind before applying for a loan. Also, using a personal loan EMI calculator can be very helpful as this online tool will help you in understanding whether the interest rate being offered is affordable.