What affects your Personal Loan interest rate?

Know all about the key factors influencing your personal loan interest rates

As the needs of the average Indian consumer are increasing, personal loans have witnessed a manifold increase in their demand. And as the financial requirement of every household increases over time, personal loans offer a ready solution to meet unexpected needs. A personal loan is an unsecured loan, which means it doesn't require any security against it, thus making it easily accessible for consumers. Moreover, it is easier for the borrower to repay the loan through EMIs.

The interest rate of a personal loan varies across banks. Since the rate of interest on a personal loan depends upon the risk involved, a bank tends to charge a higher ROI if it identifies a higher risk involved and vice-versa.

Several parameters (https://www.idfcfirstbank.com/finfirst-blogs/finance/five-factors-affecting-personal-loan-interest-rates) must be taken into consideration to know their net effect on the personal loan rate of interest. They are: 

1. Level of income

It is an important determinant of the interest rate associated with personal loans. The higher the income, the lower will be the interest rate charged. This is because people with fewer obligations and higher disposable income have greater repayment capacity, generating a greater level of trust and confidence in the lender. Hence, it is observed that people with higher income get away with lower interest rates on their personal loans.

On the other hand, banks may not forward the loan if an individual's disposable income is lesser with higher obligations or might charge a higher interest rate.

2. Credit score

A credit score reflects how effectively one can manage their debt. A higher credit score fetches two benefits; on one side, it provides faster loan approval, and on the other hand, it ensures lower interest rates. A higher credit score means a higher level of trust in the borrower since it reflects their credit responsibility and greater financial performance in terms of previous loans or credit. Typically, a credit score of 750 or above is considered to be a good CIBIL score.

3. Defaults

If the credit history of an individual reflects defaults, they might be charged a higher interest rate on personal loans or, in some instances, the loan application might not get approved. Since a higher number of defaults reflects the borrower's inability to repay loans, it attracts higher interest rates. Banks usually provide a better interest rate to a person with zero defaults and quickly approve the loan.

4. Repayment history

A bank or a financial institution always considers the repayment history of an individual before it approves the loan. It reflects how well an individual has dealt with previous loans, which generates trust and confidence in the lender. Therefore, an individual with a good repayment history attracts loans at a lower interest rate than people with many defaults since more defaults mean an inability to repay the loan.

5. Relationship with the bank

A long-term cordial relationship with a bank builds trust. Banks are often lenient when it comes to charging interest rates while lending to their trusted customers. You can avail of a personal loan at attractive interest rates through your banking relationship with IDFC FIRST Bank as well.

6. Reputation of the organisation

An individual who works for a reputed and renowned organisation enjoys the comparative advantage of quicker loan approval at a minimum interest rate. Banks perceive that an individual working for a reputable company tends to have a stable career throughout his life, thereby reducing the chances of defaults on payments. On the other hand, individuals who are self-employed or work for a start-up or a smaller company attract a higher interest rate on a personal loan.

You can take care of these aspects to the extent possible and improve your chances of getting an attractive interest rate on your personal loan. With IDFC FIRST Bank, you can get competitive interest rates starting at 10.75% and 50% off on processing fees on Personal Loans. You can apply on our website or our mobile banking app and avail a loan without having to visit the bank.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.