8 Factors that Affect Personal Loan Interest Rate Applications

8 Factors that Affect Personal Loan Interest Rate Applications

Whether you have applied for a Personal Loan recently or are considering applying for an emergency loan now amid coronavirus lockdown, one of the most important factors to consider is the interest rate.

The rate of interest helps you to establish the affordability of the loan. In a way, it tells you if the loan is suitable for your requirements. Interest rates have a direct impact on the EMIs you will serve along with the tenure. No one should avail of a Personal Loan with unbearable interest cost.

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Factors that affect Personal Loan interest rates

Personal Loan Interest Rates levied by lenders are determined after assessing the credit profile of the applicant. So here are 8 important factors that affect the interest rate quote for your Personal Loan application:

  • Credit Score: Your credit score is one of the most important factors that affects your Personal Loan interest rate. Lenders interpret your credit score to assess your creditworthiness and determine the risk factor involved. Consequently, higher is the credit score lower would be the interest rate. The lenders are assured of timely repayments with a good credit rating. Following is the standard interpretation of credit score followed by financial institutions for processing Personal Loans:
  • Above 750 – Excellent
  • 700-749 – Good
  • 699 or lower – Unsatisfactory

For instance, when you apply for an HDFC Bank Personal Loan, if your credit score is above 750, the HDFC Bank Personal Loan Interest Rate offered to you would be lower as compared to another applicant with a credit score lesser than 700. Therefore, you must check your credit score before you apply for a personal loan.


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  • Debt to Income Ratio: This is one of the most crucial financial ratios used by financial institutions to determine your Personal Loan eligibility. This ratio helps them know about your exposure to debt, i.e., how much of your monthly income is going towards debt repayments. For instance, SBI considers up to 50% of your monthly income for repayment of EMIs because there are certain fixed expenses that you must also take care of. Therefore, higher would be your debt to income ratio, higher would be the risk involved for lenders, and subsequently higher would be the SBI Personal Loan Interest Rate. So, it is advisable to repay your debts before you apply for a new loan.
  • e Reputation of the employer: The creditability of your employer is another important aspect. If you are employed with a reputed private sector company or a government department, then it is interpreted as better job security and a steady flow of income. This assures the lenders of timely repayments, and they offer lower interest rates to such applicants as compared to those individuals employed with lesser-known private sector companies. Additionally, the stability of your job, i.e., for how long you have been working with the present employer, is another crucial aspect for lenders. So, you shouldn’t change jobs just before applying for a Personal Loan.
  • Collateral: Though Personal Loans are unsecured in nature, and therefore, there is no need to offer collateral for availing this facility. But, if you have a collateral to offer such as an insurance policy of fixed deposit, the risk involved for the lender reduces considerably. Therefore, you can avail Personal Loans at extremely competitive interest rates and that too even if your credit score is somewhat lower as compared to what is required by the lender. This option is ideal if you want a Personal Loan with a low credit score and at affordable interest rates.
  • Negotiation Skills: Your negotiation skills also play an important role in securing a great deal. There are many lenders who are always looking for customers with excellent credit history and a stable source of income. When your credit profile has these qualities, you can negotiate the interest rates. Otherwise, you also have the option of the Personal Loan Balance Transfer. Remember that as Personal Loan is a significant liability, a reduction of even 0.25% interest rate can result in substantial savings.
  • Repayment history: One of the major concerns for lenders is ensuring timely repayment of the loan extended. That is why the repayment history of a borrower is considered as an extremely crucial factor. If the borrower has been repaying the EMIs and Credit Card bills on time, then the risk involved for lenders is reduced. As such, they are willing to offer lower Personal Loan interest rates. But if there are instances of EMI bounce or loan settlement in the past, the interest rates levied will be significantly higher, considering the increased risk involved.
  • Multiple sources of income: In order to determine your Personal Loan Eligibility, the lender considers your overall monthly income. If you have multiple sources of income such as salary, interest income, rental income, royalties, etc. then your eligibility improves. Higher-income helps in reducing the debt to income ratio as well, thereby allowing you to avail of lower interest rate offer.
  • Relationship with the lender: If you have a long-standing relationship with the lender such as a bank account or a Credit Card or any other form of the loan availed previously, you are in a better position to negotiate with the lender. The lender already has your financial information, which will help in understanding your financial behaviour. If you have been exhibiting financial discipline in your dealings with the lender, you will be offered a lower Personal Loan Interest Rate for your requirements.

Now that you know about major factors affecting your loan application, you can confidently apply for a Personal Loan. However, it is always advisable to use free service of online loan aggregators like MyMoneyMantra and opt for the most affordable option available in the market.


Also Read: Excel Loan Calculator – Step by Step Process of EMI Calculation


To apply online for Home Loan, Personal Loan, Credit Card, Business Loan & LAP visit www.mymoneymantra.com, the leading online lending marketplace that offers financial products from 100+ Banks and NBFCs. We have served 4 million+ happy customers since 1989.


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Category: Personal Loan