Multiple factors play a role in your personal loan interest rates. It can be overwhelming for borrowers to go through all of them. This article discusses the five main factors that affect them.
In a financial crunch or when you lack funds for something you have wanted to do, loans are a quick fix and easily accessible. They help you dodge a situation wherein you would have to borrow from a relative or friend and do it on your terms. Therefore, more people are applying for loans today than ever before. The additional convenience of applying for loans online have made them particularly popular in recent times.
An instant personal loan is unsecured loan, meaning there is no need to pledge an asset as collateral for you to avail of the loan. While availing of a loan, the interest rate, tenure, and EMI are the three main things to consider as a borrower. These factors are further affected by numerous conditions, as you will see during your application process. The following are the top 5 aspects that determine the financial burden of the loan.
5 Factors that Affect Your Personal Loan Interest Rates
Your income indicates your repayment capacity, and a higher disposable income is a good sign for lenders. It gives you an edge over other applicants in availing of loans at a competitive and relatively lower interest rate. Many even consider income to be the most important factor in determining the interest rates for your loan.
- CIBIL score
Your CIBIL score, or credit score, also plays an equally important role in determining your personal loan interest rate. It reflects your history with repaying debts, disposable income, and spending, which indicates to the lenders whether you are a good fit for lending a loan. The credit score is essentially a 3-digit numerical provided by Credit Rating agencies. It is based solely on your repayment history of credit card bills and other debts. A score of 750 is considered a good score, and anything above that will only increase your chances of having a loan sanctioned.
While employment is a factor that lenders consider, job stability is something that many borrowers overlook. Lenders will look into the company or organisation you work for and see if it is an established and reputable place that ensures no job volatility. If lenders deem that your organisation is not stable enough, your interest rate will likely be higher. In contrast, some lenders relax their lending guidelines for borrowers of specific organisations.
- Debt-to-Income Ratio
DTI is the percentage of disposable income going towards debt repayment. Your total debt payments divided by your total income throws up the debt-to-income ratio. A higher than 50% DTI makes loan application acceptance less likely. Especially since these loans are unsecured, the lender becomes even warier.
The lender will view your amount of debt against your income and see the total debt you are currently servicing. Your pre-existing loans and the amount of income spent on EMIs will greatly impact your loan approval. The lower your debt-to-income ratio is, the better it is for your chances of a loan sanction.
- Existing Relationship
Having a good rapport with a financial institution or lender always works out in your favour. If you already have a long-standing relationship with your lender and have availed benefits of lines of credit from them in the past, it will surely help you get a better personal loan interest rate. Since the lender is already aware of your income, repayment history, ability to repay, and liabilities, there will be less questioning and, therefore, easier loan sanction.
Overall, inferring from the points mentioned above, it is evident that taking loans can be expedited by borrowers considering a few aspects that help lenders determine their financial standing. Using an personal loan eligibility calculator before opting for a loan can further speed up the process, ensuring faster, guaranteed approval.
Borrowers are advised to commit to lenders who offer a smoother process with competitive interest rates and flexibility in loan tenures and EMIs. Choosing such a reliable lender can also mean instant disbursal of your loan, as long as you meet the eligibility criteria!