Personal Loan: 6 factors that determine your interest rate | Mint

When you apply for a personal loan, the banks consider different factors to determine the interest rate chargeable. Some of these are related to broader factors, like the macro interest rate scenario in the economy and RBI norms. Some relate to your profession and personal factors, like your credit score, past repayment history, relationship with the bank, etc. Let us discuss each of these and how they influence the interest rate chargeable on personal loans.

Macro interest rate scenario

Depending on the macro interest rate scenario in the economy, banks decide the interest rates chargeable on personal loans and other loans at a broader level. For example, as of December 2024, we are in a higher interest rate scenario. In the last couple of years, to tame high inflation, the Reserve Bank of India (RBI) has increased the Repo Rate from 4.00% in 2022 to the current 6.50%.

As the increase in Repo Rate increases the overall cost of funds for banks, they pass on this increase to customers through higher interest rates on loans. As the RBI increased the Repo Rate, the banks increased interest rates on all loans, including personal loans. Currently, most banks offer personal loans in the 10.00% to 15.00% p.a. interest rate range.

Going ahead, in 2025, as inflation falls within the RBI’s comfort zone, the RBI is expected to cut interest rates. As and when that happens, the banks are expected to pass on the benefit to customers in the form of lower interest rates on personal loans and other loans.

Credit score

Banks consider a credit score of 750 or above a good score to approve personal loans and other loans. If your credit score is significantly higher than 750, you can use it to negotiate with the bank for better terms on your personal loan. These can include a lower interest rate, a higher loan amount, a longer loan tenure, a discount on or waiver of processing fees, etc.

Your higher credit score can help you get a personal loan at a lower interest rate than others with a lower credit score.

Relationship with the bank

If you are holding a savings account with a bank for a long time, it can help you get a personal loan at better terms. It depends on how old your savings account is, the type of account, the balance maintained in the account, the net relationship value (NRV) with the bank, etc.

Most banks have variants of savings accounts requiring a specified minimum balance to be maintained. Based on the savings account variant, banks offer certain benefits to customers. The higher the savings account variant, the higher the minimum balance required to be maintained and the higher the benefits offered.

Some of the benefits include priority service through a dedicated relationship manager, free locker or at a discounted rate, family banking, various discount or BOGO offers on debit cards, preferential rates on loans, competitive forex rates, complimentary airport/railway lounge access, etc.

One of the benefits of privilege or preferred banking is preferential interest rates on loans. So, if you are a preferred customer, you can get a personal loan at a lower interest rate compared to other customers.

If you have an existing loan running or had one earlier with the bank, it can get you better terms for the personal loan application. For example, if you have had a home loan running with the bank from the last more than five years or so, and have been paying the EMIs on time, the bank can reward you for timely payment with a lower interest rate on your personal loan application.

Profession: Are you salaried or self-employed?

Your profession may influence the interest rate charged on a personal loan. For example, some financial institutions may consider salaried people relatively less risky than self-employed people. It is because salaried individuals have a fixed amount coming in regularly at a specified date every month. On the other hand, in the case of self-employed individuals, the income amount and the dates on which it comes are uneven.

The bank also looks at the stability of the individual’s job. If the individual has been working with the current employer for more than 3 to 5 years, it is a sign of stability, which is good. If the individual has a secure Government job, it is a plus point.

Hence, finance institutions may charge a slightly lower interest rate on personal loans for salaried individuals than for self-employed individuals. From time to time, some banks may have a tie-up with some corporations and offer their employees loans at a more concessional rate than others.

Past repayment history and defaults, if any

Do you have a clean track record of timely repayment of credit card monthly bills and/or loan EMIs? If yes, it may help you get a personal loan at a lower interest rate than others. The bank can get your repayment data from your credit history with a credit bureau like CIBIL. Hence, it is always a good practice to pay the loan EMIs and credit card monthly bills before or by the due date.

If you have delayed or defaulted on any loan EMI and/or credit card repayment, it can be a red flag for the financial institution. They can consider your personal loan application risky, and charge a higher interest rate or reject the application.

RBI norms

The RBI norms for unsecured loans like personal loans and credit cards impact interest rates for these financial products. For example, in 2023, unsecured loans were growing at a faster rate than the RBI’s comfort level. Hence, to slow the growth pace of unsecured loans, the RBI increased risk weights on personal loans from 100% to 125% in November 2023. As banks had to set aside more capital for these loans, they had to increase interest rates on personal loans and other unsecured loans.

How to get a personal loan at a lower rate?

We have discussed the various factors that play an important role in determining interest rates on personal loans. Some factors, like the macro interest rate regime, RBI norms, etc., are not in your control, and you cannot do anything about them. However, individual factors like your credit score, relationship with the bank, profession, past repayment history, etc., are in your control. You can leverage these factors to negotiate with the bank for a lower interest rate on your personal loan application.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.