A personal loan is essential when you want to make a significant investment. This could be buying a house, a car, or even completing your education. In some emergencies, you have to take a loan to finance medical expenses. It becomes necessary, then, to make sure your chances of getting that loan approved are as high as possible. The personal loan interest rate determines how quickly you’ll have to pay it back, without incurring a considerable loss. This article aims to help you figure out which factors affect your interest rate and what you can do about it.
What is a Personal Loan Interest Rate?
A loan interest rate is the interest charged by a lender on a personal loan. It is the cost of borrowing money and is usually expressed as a percentage of the loan amount.
What Impacts the Interest Rate?
Your personal loan interest rate can significantly impact the overall cost of borrowing and affect your monthly payments. To make informed financial decisions, it’s essential to understand the various factors that influence this rate. In this blog, let’s have a look at the key elements that lenders consider when determining your loan interest rate.
Who Can Get Easy Loans
People with excellent credit often qualify for the best interest rates on personal loans. However, other factors can affect your interest rate, like your total debt, how much you borrow, and the lender’s eligibility criteria.
Factors Influencing Interest Rate for Loans
It’s a no-brainer that a credit score is important for maintaining a good relationship with the bank, and hence getting a loan sanctioned. But let us look at all the factors that influence the interest rate.
Credit History and Credit Score
Your credit history is another important factor influencing your interest rate. The lender will examine your credit history to determine whether you have repaid your debts in a disciplined manner in the past. Past defaults will also be scrutinized (if any), along with your overall loan management.
Scores That are Considered Good
To ensure you get the best possible interest rate, it’s crucial to maintain a good credit score by paying bills on time, managing credit wisely, and addressing any discrepancies on your credit report. The credit score is also worth noting since it demonstrates your overall creditworthiness. Scores of 700-750 may help you obtain the loan smoothly at a better rate.
Loan Amount and Term
The loan amount and term also play a role in determining your interest rate. Larger loan amounts may come with higher interest rates, as they represent a higher risk for the lender. Additionally, longer loan terms may result in higher interest rates due to the extended period of risk exposure for the lender. When applying for a personal loan, carefully consider the loan amount and term that align with your financial goals and repayment capacity.
Debt-to-Income Ratio
Lenders evaluate your debt-to-income ratio, which is the proportion of your monthly income that goes toward paying off debts. A lower debt-to-income ratio signals financial responsibility and a higher capacity to handle additional debt. As a result, borrowers with a favourable debt-to-income ratio are likely to qualify for lower interest rates.
Improve the Ratio
There are some ways to improve your debt ratio. To improve your debt-to-income ratio, consider paying down existing debts before applying for a personal loan.
Monthly Income Considered
Your monthly income is assessed by the lender to determine whether you can repay the loan comfortably or not. A higher salary, as well as a stable salary that is credited monthly, is preferred by banks in particular. This is why a minimum salary/income criterion is set by most lenders. You can only apply if your salary is sufficient to repay the loan.
Employer Reputation
Kind of similar to the previous point, if you work for a reputable company and have a stable job, it creates a positive impression on the lender. It may help you get a better interest rate in some cases.
Economic and Market Factors
Finally, market forces. This one is actually out of your control. Interest rates are also influenced broadly by market fluctuations, inflation, recession, repo rate policies, and other aspects. In inflationary environments, personal loan interest rates are higher, while a recession often equates to lower rates. A cut in repo rates may also translate into reduced interest rates.
Tips to Get a More Appealing Interest Rate
You can employ some strategies to ensure that your interest rate doesn’t skyrocket. These are naturally inspired by the factors we listed above. Here they are:
Improve Your Credit Score
Prior to applying for a personal loan, try to boost your credit score. Try paying off smaller debts like credit card dues quickly as well. You can do this by paying your loan EMIs in a timely manner without defaulting or missing any payments. You should also check your credit report carefully. That is to find errors that may have led to a lower credit score. Once you have a better credit score, apply for your personal loan.
Use a Salary Account
Apply for a personal loan from the financial institution where you have your salary account. Salary accounts have better-maintained data about your payments, separate from your personal expenses. It is more objective. It may help you get a better rate of interest. Sometimes shifting your salary account to a new institution may help you in the same way.
Clear Your Debt to The Maximum Level
The debt incurred looks unsightly to your lenders. It makes for an unstable image, creating hesitation. The ratio of utilization of credit to your income is very important. Reduce this and keep it to a maximum of 30%. This is possible if you repay your credit card dues and other loans before applying for a fresh personal loan.
Consider a Debt Consolidation
If you have lots of high-interest credit card debt, consider a debt consolidation loan. A debt consolidation loan consolidates all your debts under one loan, freeing up your utilization ratio and boosting your score.
Cut Down Your Expenses
In addition to debts, lenders also consider your expenses when deciding if you can afford a loan. Try to minimise huge expenses right before a loan. Before you apply for a personal loan, look at your budget. While you may not be able to move to a cheaper apartment, you might be able to cut down on other expenses to lower your overall monthly costs and free up more room in your income.
Apply with a Co-Signer or Co-Borrower
You may find it difficult to qualify for a personal loan if you’re working to improve your credit or you’re still building a credit history. Or, you may be offered a loan at a higher interest rate than you’d like. Ask a parent, family member, or trusted friend to cosign the loan or act as a co-borrower.
What does a Co-Signer Do?
A co-signer acts as a backer on your loan. They won’t have access to the funds, but they do agree to make payments or pay off the loan in full if you default. A co-borrower, on the other hand, shares access to the funds and is equally responsible for making payments. To get the best interest rate, look for a co-signer or co-borrower with a high credit score, low debt, and a good income history.
Take Smaller Loans, For Short Durations
This strategy may help you qualify for a loan you wouldn’t receive otherwise. It can also help you avoid borrowing at a higher-than-expected rate. Some lenders tend to view shorter repayment periods as less risk. So, you may be able to pay less in interest if you choose a 12-month repayment period over a 24-month loan.
What is the Average Personal Loan Interest Rate?
Personal loan interest rates are often less than credit card interest rates. As of May 2024, the average interest rate for a 24-month personal loan is 11.92%, according to data from the Federal Reserve. Rates fluctuate, so it’s always a good idea to check on the latest average rates when loan shopping. Keep in mind that loan rates also vary widely by lender.
2025 Updates
In May, consumer credit increased at a seasonally adjusted annual rate of 1.2 percent. Revolving credit decreased at an annual rate of 3.2 percent, while nonrevolving credit increased at an annual rate of 2.8 percent.
Conclusion
Remember these things prior to submitting your personal loan application. It may help you get a more favorable interest rate. Attempt to boost your CIBIL score and leverage your association with your lender if it is possible. You should also reduce your liabilities before applying. The rate has a direct impact on your EMI and loan outgo. All these factors affect your personal loan interest rate, so it’s best to monitor them closely before applying for a loan.
FAQs
1. What is the interest rate for a personal loan?
Personal loan interest rates may vary across lenders. On average, it may range between 12-38% per annum.
2. Can I apply online for a personal loan?
You can apply for an instant personal loan online if you have a high credit score of 750 or above
3. Can my salary really influence the loan interest rate I get?
Yes, absolutely. Lenders want to know if you earn enough to comfortably manage the monthly payments. A stable and sufficient income suggests you’re a lower risk, which could help you get a better rate. Plus, if your salary is credited to a well-known bank, that’s another bonus in the eyes of many lenders.
4. Is a credit score important for a personal loan?
Your credit score reflects how reliably you’ve handled debt in the past. Lenders see a high score (typically 700 or above) as a sign that you’re likely to repay the loan on time.
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