Factors Affecting Personal Loan Interest Rates

Lenders fix interest rates primarily on the basis of their cost of funds and the credit risk evaluation of their loan applicants. Here are some of the key factors that can influence your personal loan interest rates:

Credit Score : Many lenders have started factoring in the credit scores of their loan applicants while setting their interest rates. Those having higher credit scores are offered personal loans at lower interest rates than others. Hence, try to maintain credit scores of 750 and above. Good financial habits like repaying your credit card bills and EMIs by their due dates, avoiding multiple loans or credit card applications within a short period and maintaining a minimum credit utilization ratio would help you maintain higher credit scores.

Income : A higher income indicates a higher capacity to repay the loan. This leads to lower credit risk for the lender. Thus, many lenders offer lower personal loan interest rates to those having a higher income.

Employer : Many lenders consider the employer profile of their personal loan applicants while setting their interest rates. Salaried individuals are usually charged lower interest rates than the self-employed ones due to the former’s higher-income certainty. Among salaried applicants, government and PSUs are usually offered lower interest rates due to their higher job security and income certainty. Then, comes to the personal loan applicants employed with MNCs and reputed private sector organizations as such companies are usually considered to have higher chances of withstanding economic downturns than other private sector organisations.

Existing lending or banking relationship with the lender : Many lenders offer personal loans at concessional interest rates to applicants having existing banking or lending with the lender. Hence, those planning to avail personal loans should always contact the banks/NBFCs with whom they already an existing lending or banking relationship for personal loan offers.