So, what are the 5 leading factors that can determine your personal loan interest rate? Let us look at each one of them:
1. Monthly income
Whether you are salaried or self-employed, your monthly income is a major deciding factor when applying for a personal loan. The rule is - higher your monthly income, the lower will be your loan interest rate. This is because the lending bank evaluates high-earning applicants as being less likely to default on their monthly repayments.
As an example, a lending bank may offer a personal loan at a high-interest rate of 14% if you are earning a monthly income of Rs50,000 or at a lower 12% if you are earning over Rs1lakh monthly.
2. Credit score
Your credit score also matters when it comes to the interest charged on your personal loans. A higher credit score (of more than 750) is a healthy sign and can give you a personal loan at a lower interest rate.
How is your credit score affected? Several factors such as missed (or late) EMI payments on previous loans – or even loan defaults – can negatively impact your credit score.
Also remember that if you have a “poor” credit score, your personal loan application can even be rejected by the bank – or may be offered at an extremely high-interest rate. While most banks consider 750 as a good score to offer a personal loan, a credit score of over 800 can get you an average drop of 0.25% in your loan interest.
3. Company reputation
Yes, the reputation of your employer matters! if you are working with a reputed or trusted company, you can get a better deal on your personal loan. The reason is simple – banks perceive employees of leading companies to have a stable job and less likely to default on their repayments.
How do banks determine the status of your organization? They use several categories – including “Top 1000 companies” or “Leading MNCs in India” and so forth.
If you happen to work for a smaller business or start-up – with less than 100 employees, banks are likely to charge you a higher interest rate on your personal loan.
4. Loan payment history
Apart from your overall credit score, banks also check your previous repayment record or history before deciding on your loan interest rate. If your bank or lending company sees that you have been disciplined with your previous loans and EMI payments, then they are likely to charge a low-interest rate on your loan.
Ideally, most banks prefer to lend to customers who have not defaulted in the previous 12 months. For most loan defaulters, banks either charge a hefty interest rate on the loan – or even reject the loan application.
5. Relationship with the bank
The final factor that can determine your personal loan interest rate is if you have been a long and loyal customer with the lending bank. Most banks who have had a long and healthy relationship with any existing customer – do offer them special privileges or discounts on personal loans to maintain a strong relationship.
For example, if you are having a savings or salary account with a select bank and have maintained a healthy account balance, the bank is most likely to give you a concession of 0.5 to 1% on your loan interest rate.
Similarly, you can expect a favorable interest rate on a new loan if you have availed of other retail banking services like fixed deposits, credit cards, home loans – from the same bank – and have had a good repayment history on any of these services.
Apart from being a loyal customer, if you have had a good professional relationship with your bank manager or your customer relationship executive, you can also try negotiating with them to get a better deal on your personal loan.
Now that you know the five main factors that can influence the interest rate on your personal loan, you need to compare the personal loans offered by different banks and choose the one that suits you the best.