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What are the Factors That Affect Personal Loan Interest Rates?

Personal financing terms vary according to the lenders. However, there are a few common factors that go into the interest rate calculation. If you plan to borrow some money, read through this article to understand the various factors that can affect your personal loan interest rates.

 Credit score

Your credit score offers a snapshot of your credit history. A higher CIBIL credit score of 750 is considered healthy and will help you get a lower interest rate. Why? Because it indicates to the lender that you are likely to repay your debt in time and your default probability is low. Since a personal loan is unsecured, lenders consider your credit score while evaluating your loan application.

Monthly income for a personal loan

Your monthly income plays a vital role in deciding your personal loan interest rates. A high monthly income instils confidence in the lender of your repayment ability. Most lenders also offer reduced interest rates to individuals with a steady income source as it provides a higher probability of timely loan repayment.

Ongoing debts

While your credit score and income will provide an overview of how much debt you can handle, ongoing loans can also affect your interest rates. Put simply, regardless of your income and credit score, if you already have a debt, lenders can see that a substantial amount of your income is spent in repaying the previous loans.

As such, the reduced income lowers your loan eligibility for the lender. A low debt to income ratio also results in lower interest rates, as it shows low obligations on the borrower’s part.

Credit repayment history

Your credit repayment history is another factor taken into consideration when you apply for personal loan. Lenders check your credit repayment history to review your loan repayment and how you have handled your previous debts so far.

Defaulting or delaying EMI payments can also negatively affect your overall credit score, which may mean a higher interest rate on your loan. However, timely repayment of loans, even credit card dues, can help you improve the credit score and secure a lower interest rate.

Personal Loan tenure and loan amount

Conventionally, lenders usually charge a lower interest rate on higher loan amounts and tenures. However, you may be charged higher interest rates depending on the above-mentioned factors.

For example, if your monthly income is Rs. 1,00,000 and your loan tenure is such that the EMI will be Rs. 70,000, which indicates that a considerable amount of your income will be going into repayment. This also suggests a likelihood of defaulting or delayed payments in the future. So, the lender may charge a higher interest rate.

Your relationship with the lender

A long and trustworthy relationship with your lender will help you in getting competitive interest rates. This is because lenders are lenient when dealing with loyal customers with a good history.

In conclusion

As you can see, multiple factors affect the interest rates you receive on your loan regardless of the lender. But timely debt repayment and a steady income go a long way to help you secure lower interest rates irrespective of your personal loan eligibility.

Abubakar is a writer and digital marketing expert. Who has founded multiple blogs and successful businesses in the fields of digital marketing, software development. A full-service digital media agency that partners with clients to boost their business outcomes.