A personal loan is a convenient source of funds if you are under financial stress and do not have a property or shares to keep as mortgage or security with the lender. While applying for personal loans, you may find that the interest rates on personal loans are quite high compared to other types of loans. There is a specific reason behind this. Lenders charge high personal loan interest rates as this loan is unsecured, i.e. you do not have to provide any mortgage or collateral. So, the lenders want to protect themselves from the risk of non-repayment. Read on to know about certain factors that affect this interest rate.
You would not find a uniform interest rate on a personal loan as they vary between different lenders. The rates depend on the lender’s policies as well as the borrower’s status. Whether you go for an online or offline mode of application, the rates and charges would remain the same. The factors influencing the interest rate include:
Income is the main influencer when a lender fixes your personal loan interest rates. Almost all lenders assume that people with high incomes would have a greater repayment capacity than those with lower incomes. So, they lend funds to people with high and stable incomes at lower interest rates. For borrowers with lower income levels, the lenders generally charge a high-interest rate.
The credit score is important for both loan approvals and interest rates. The credit score takes into account the financial condition of an individual in terms of income, existing loans, frequency of taking loans, repayment history, etc. A high credit score increases the chances of getting loans at lower interest rates while a low credit score decreases it. A score of more than 750 is considered good by lenders.
Your organisation or employer
Since personal loans are unsecured or issued without collateral, lenders consider several factors that assure the borrower or applicant’s creditworthiness. They will look at the company status where you work. Lenders think that applicants from an esteemed organisation would be more financially solvent than others and make timely payments. The lenders may offer much more relaxed lending policies if you work with certain organisations as well as a low-interest rate.
Debt-to-income ratio is the result that you get when you divide all your debt payments by your total income. The lenders may check whether a major part of your salary is going into debt repayments. This would affect the interest rate. A higher debt-to-income ratio means you have a lot of loans to repay back and the lender may charge a higher interest rate on your loan to stay safe.
Relationship with your lender
If you are an existing client or past client of the lender and he thinks that you are trustworthy, chances are that he may charge lower personal loan interest rates on the loan. But it may take a long time to build this reputation.
Your payment history
If there are defaults in your credit history, the lender can charge you a very high rate of interest or might even reject your loan application. Most lenders prefer applicants with zero defaults over the past one or two years.
If you are a doctor, you may get a low personal loan rate of interest as some lenders have specially designed loans for people with the following educational qualifications:
- Super specialist doctor (MD/DM/MS) with MBBS degree registered with the medical council
- Graduate doctor (MBBS) with degree registered with the medical council
- Dentists (BDS/MDS) with a minimum of 5 years of post-qualification experience
- Ayurvedic and homeopathic doctor (BHMS/BAMS) with a minimum of 2 years of post-qualification experience
You can apply through online or an offline mode of the loan application but the online mode is more convenient. This is because you can complete the entire process remotely and without the submission of any hard copy. The process of an online application consists of the below steps:
Check your loan eligibility with an online EMI (Equated Monthly Instalment) calculator
Find out the monthly instalments that you have to pay for loan repayments along with interests. The EMI is a key factor in deciding the loan amount and tenure. It helps you to instantly calculate the monthly payment amount and plan your budget in advance so that the repayment process is not stressful.
You may apply online and follow the links and instructions given on the website. Fill out the online application form and provide your details. Do not hide the facts because the lender would cross-check regarding any discrepancy related to the information that you had provided. Any false information may result in rejection of your loan application or lead to a high amount of interest on the loan. The lender would take a few days to verify the details that you have provided, conduct a background check, etc.
The lender’s offer
Based on your eligibility, you will see the lender’s offer of a specific loan amount, repayment period, interest rates, processing charges, etc. These criteria may vary but there are some standard requirements like:
- You have to be a salaried employee or a self-employed individual having a steady source of income
- A minimum net monthly income cut-off as specified by the lender
- Ensure that you have a good credit score
- You should be a citizen of India
- Upload soft copy of documents
Once you accept the offer, you may have to submit soft copies of certain documents before the lender sends the loan amount to your account. You will find the list on the website itself or the lender may mail you the requirements.
There are certain factors that affect the personal loan interest rates like your income, credit ratings, etc. That is the reason why they vary between different lenders who try to protect themselves against risks of non-repayment. If they are favourable for you, you can save a significant amount of money during repayment.