In India, personal loans have been the top preference for individuals seeking urgent finance. With increased need for effective financing avenues, the market competition among financial lenders has also tightened. Thanks to the advent of fintech companies, today, you can a host of benefits when availing finance through a personal loan app. But, when it comes to personal loans, high interest rate remains a major concern!
Cash loans are unsecured form of loans. The lenders do not ask you to submit any collateral or guarantor to avail these loans. This makes personal loans high risk debt tools and lenders balance out this risk with higher interest rates.
The interest rates on personal loan are impacted by various fixed and variable factors. It is only prudent to know about these factors in detail before you apply for the loan. This will help you make a better borrowing decision.
Read on to find out all crucial details related to personal loan interest rates for improved affordability of your cash loan.
Borrower-related Factors That Impact Personal Loan Interest Rates
The interest rate that lenders charge on your loan is influenced by your financial profile. Not all borrowers submitting the loan application are approved for the loan. Similarly, not all borrowers are offered the loan at the same interest rate. Here are the most important factors on your application that the lender checks while determining your cash loan interest rate.
- Monthly income
Your monthly income plays a crucial role in determining your borrowing affordability. A high-income individual stands a better chance of negotiating for low rates of interest with the lender. Multiple income sources further diversify this risk and posit the borrower at a better situation for availing low rates.
- Existing liabilities
Your existing liabilities impact your repayment capacity. Combined with your borrowing requirements, this impacts the interest rates your lender levies on the advance. Ideally, your liabilities should occupy less than 50% of your total monthly income.
- Credit score
Your credit score determines your creditworthiness depending on your past credit history. Your repayment habits, defaults, missed payments, and mismanaged borrowing can affect your credit score negatively. Even though some reputed personal loan apps offer you a personal loan despite low credit score, the interest rate levied will be high.
- Crucial financial ratios
Your fixed-obligation-to-income ratio (FOIR) and your credit utilization ratio are the factors that influence your interest rate determination. Your FOIR should ideally be under 50% and credit utilisation ratio not more than 30%.
- Employer and employment stability
The reputation of your employer and your employment stability are among important factors. Most Indian lenders, including platforms like personal loan apps, consider your employment status for determining your interest rate.
Policy-Related Factors That Impact Personal Loan Rates
In addition to your personal financial profile, the interest rate levied on the personal loan also depends on several policy-related factors. Here are some of the important factors that you must know about –
- Base rate system followed
The interest rate on these cash loans are tied to a base rate that sets the minimum threshold for levy. Currently, the repo rate serves as the base rate, and any change to it impacts the rate thereto. This repo rate is determined by the RBI and it remains same for all lending institutes.
- Lender’s spread
The final levy on your personal loan is also impacted by the spread that the lender chooses to add to the base rate. This usually comprises the cost of lending plus the risk coverage for the financier when lending. This rate can differ from lender to lender. Usually, a personal loan app has lower spread than conventional borrowers.
- Current trends in the market
Current market trends related to the economy also impact the final rate levy on these loans. Most lenders consider the current trends in the market before determining your interest rate.
Tips to Get Personal Loans at Low Rates of Interest
When applying for a personal loan you can employ the following ways to secure a low interest rate on your advance. Getting a lower interest rate can considerably bring down your total interest pay-outs. It will also lower your EMI burden and enable you to choose a lesser loan tenure.
- Take steps for credit score improvement
Your credit score is a crucial factor impacting your personal loan interest rate. Taking steps to create a positive impact on your credit history will help you negotiate for a low rate of interest. You can make timely repayments, avail a mixed credit bag, keep credit utilisation low, and close your on-going loans, to improve your credit score.
- Choose a loan amount and tenure as per your affordability
Your choice of loan amount and tenure also affects the interest rate on your cash loan. You must thus assess the combination of loan amount and tenure to keep your loan affordable. You must use a personal loan EMI calculator for better assessment of this affordability.
- Compare lenders for the best rates
The final rates levied by different lenders vary significantly. Thus you must analyse the market and compare lenders for the best rate availability. Doing an in-depth research will help you get the best interest rate on your loan.
- Time your borrowing well
You can also attempt to time your borrowings well around holiday seasons. Many lenders offer interesting deals during this time of the year. So, if your loan requirement is not urgent, then wait for offer season. You can download a personal loan app to get all the updates on loan offers.
Today, you can avail a cash loan through platforms like personal loan apps at the best rates. These loans are perfect for small-ticket requirements. However, if you need a big-ticket loan for home renovation, medical emergency, wedding expenses, or international holidays, then you can apply with you’re the financial institution where you have existing relationship. The bank where you hold your salary account or loan account can offer you good offers. Make sure to weigh all your options, negotiate with your preferred lenders and only go for an offer that suits your affordability.