Getting a personal loan can be a lifesaver in many financial situations and offers much-needed financial relief. However, the interest rate you are offered can make or break your budget if you are not careful. With higher interest rates, repayments become more expensive and can extend the time needed to fully repay the loan. So, understanding the key factors that affect your loan’s interest rate is critical to ensure you get the best deal possible and stay in control of your finances. With that being said, let’s take a detailed look at crucial factors that determine how much interest you will be charged.
- Credit score
Your personal loan eligibility is highly influenced by your credit score. It is an indicator of your creditworthiness, and lenders use it to determine whether they should approve your personal loan and at what rate.
Generally, a high credit score indicates that you are a responsible borrower and gives lenders more confidence in your borrowing ability. The higher your credit score is, the better terms and rates you can expect from lenders. However, it’s worth noting that different lenders may have different standards for what is considered a “good” credit score; some may look for scores over 750, while others may be satisfied with a score of 700.
- Income
Generally, borrowers with a higher income and stable job are more likely to receive a lower interest rate as it shows lenders that repayment of the loan will not be a financial burden. In case of a lower income or unemployment, it may be difficult for lenders to accept the loan application. They might approve your request, but you may have to settle on a high personal loan interest rate to mitigate the risk of default.
- Your relationship with the lender
Establishing a long-term relationship with the lender has its benefits. They often consider the length and history of the association with the customer before offering an attractive personal loan interest rate. If you have been a valuable customer for quite some time, by making deposits in savings accounts and fixed deposits, or by making timely payments of credit dues, you have an added advantage to qualify for an instant personal loan with lower interest rates.
In case you already have loan offers from multiple lenders, consider using a personal loan EMI calculator to determine the loan offering a better interest rate and favourable tenure.
- Debt-to-income ratio
Your debt-to-income ratio is calculated by dividing the monthly debts you pay, including housing and other loan payments, by your gross monthly income. It gives lenders a clear view of your financial condition and how you manage your monthly debts.
A high ratio may indicate that you already have existing debt obligations and could struggle to make loan payments. Lenders typically tend to offer a lower personal loan rate to those with a low debt-to-income ratio because it indicates that their monthly income is sufficient to cover expenses due each month. Thus, before you click the personal loan apply button, take time to review your debt-to-income ratio and take necessary measures to reduce your total debt burden.
Final words
Now that you know the key factors that can affect your personal loan interest rate, you can work on ensuring they are all in check before submitting a loan application. A lower personal loan interest rate will reduce your total interest outgo and make the loan more affordable for you.
