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The affordability of a personal loan depends greatly on its interest rate. A higher interest rate can lead to higher EMIs. Individual banks and lenders do not levy the same interest rates to every individual. Multiple factors affect this decision.
Your income is the foremost deciding factor for your personal loan application. The greater your income, the higher your chances of being assigned lower personal loan interest rates. The bank needs to determine how easily you can repay the loan amount. To provide customers with a personal loan, the bank needs to trust them. This can only be possible when their income is above a certain minimum value.
Before the loan is approved, a lender will usually evaluate your CIBIL score to understand your credit history. The credit score is a 3-digit numeric rank provided by the Credit Rating Agency to individuals based on their credit repayment history. A good credit score is an indication that you can manage the loan well and repay in time.
Individuals working for a renowned organisation are more likely to receive a low interest on personal loans. Banks view employees working in renowned companies to have a fairly stable career and hence believe that they would make regular payments.
Along with your overall credit score, previous repayment records will also be checked before your loan interest rate is decided. If the bank or lending company sees that you have been disciplined with your repayments, you will probably be charged a low-interest rate on the loan. Most banks will prefer lending to customers who haven’t defaulted in the previous 12 months. For most loan defaulters, the loan application is rejected, or a hefty interest rate is charged.
Your history of opening savings accounts and fixed deposits with your bank would have made you a loyal customer. Your loyalty can establish an interpersonal relationship with the bank which could fetch attractive personal loan interest rates. An existing relationship will come with a certain sense of leverage, as the bank wouldn’t want to lose you to a competitor.
The five factors discussed above influence the interest rate on your personal loan. Ensure that these factors work in your favour before you apply for one.
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