Personal loan interest rates: 7 key factors that impact your borrowing costs | Mint

Personal loan interest rates can significantly impact the cost of borrowing and should be carefully considered before applying. Several factors determine the interest rate you qualify for.

Some of them are: credit score, earlier repayment history, credit limits, borrowing potential, old assets etc., according to a detailed report by ANI.

What is a personal loan?

A personal loan is generally an unsecured loan that is offered by financial institutions to borrowers. This loan is mostly offered for them to meet various personal needs. Medical expenses, education, debt consolidation, home improvements and construction etc. Now unlike secured loans an unsecured loan doesn’t require any collateral with it. This makes it a convenient option for aspirational borrowers.

Further, personal loans are distributed based on factors such as applicants credit score, income, repayment history, employment stability and fair predictability of the future along with other associated things.

Generally personal loans have fixed interest rates and repayment terms, in the range of one to five years. Borrowers repay the amount taken as loan through monthly installments i.e., EMIs.

While easily accessible personal loans often have higher interest rates due to the lack of security. This highlights the importance of careful financial planning.

Factors to determine the interest rates a borrower qualifies for

The ANI report further elaborated on some of the factors to determine the interest rates a borrower qualifies for. It is important for aspirational borrowers to carefully understand these terms and conditions to ensure they are able to inform decisions in the future.

• Income: This is something self explanatory. Higher income which has a history of stability assures lenders of the borrowers repayment potential. This is the first factor for ensuring you are able to secure a fairly lower interest rate deal in your loan request application.
• Credit Score: It is important to note that a score between 750-900 is a good score. It indicates strong creditworthiness, earning you better interest rates. A lower score, on the other hand, may increase borrowing costs. Eventually, it comes down to how good an individual’s repayment potential is. If it is fairly strong the credit score is naturally going to be good and if the credit score is good the applicable interest rate on the loan availed will be lower.
• Existing Debt: For companies this metric of debt-to-equity ratio should always be less than 1. If it is less than 1 then the company is reasonable to an extent. Whereas if it is more than 1 then the company’s financials need proper analysis. Similar is the case with individuals as well. Hence, lower your debt-to-income ratio the higher is your chance of securing a favorable loan deal. A higher debt-to-income ratio may lead to higher interest rates as lenders will see the borrower as a riskier entity to lend.
• Stability in employment: Work for the government or some other reputed organization reflects stability and accountability both. This is favorable for lower interest rates. On similar lines consistent business performance helps self employed borrowers ensure obtaining loans on lower interest rates.
• Past relationship with a lender: Generally existing customers enjoy special rates and treatment due to their loyalty. This happens due to their account history. That is why one should not close old accounts and always ensure that all previous payments are made regularly without any delay. Integrity, accountability, transparency are three pillars in this domain.
• Repo Rate: Reserve Bank of India impacts personal loans indirectly by repo rate changes. A lower repo rate results in a more affordable loan agreement. Therefore, this point needs to be kept in mind as well by all aspirational loan seekers.
• Tenure of the loan: A short tenure generally results in lower interest rates. Whereas such loans demand higher EMIs. In this case it is important for borrowers to clearly understand and write down the terms and conditions for the loan service availed by them. Clarity on the borrowing terms, interest rates, repayment tenure and associated issues brings absolute peace of mind for the borrower and helps in facilitating a seamless loan repayment experience.

What are things to keep in mind to secure affordable rates?

Now to secure affordable rates for your personal loan one needs to improve his or her creditworthiness. This can be done simply by making sure that all outstanding dues are cleared in a swift and diligent manner.

Using financial tools like loan calculators, loan comparison tools for better decisions along with ensuring that a solid loan borrowing and repayment strategy is already in place before one opts for a loan. Clarity of thought is decisive here and can help you in securing the best deal possible.

It is hence important to read, understand terms like personal loan eligibility, personal loan EMI and personal loan interest rates etc. Then leveraging the acquired knowledge carefully in order to make informed borrowing decisions. As all these steps can immensely help in lowering ones overall financial burden.

(Note: Raising a loan comes with its own risks. So, due caution is advised)