Applying for a Personal Loan? Here’s What Affects Its Interest Rate

Even though most of us avail Personal Loans owing to the ease and convenience it offers (in comparison to other types of loans), what we don’t most probably are not aware of is the fact that the rate of interest on Personal Loans varies from individual to individual, and depends on a number of factors. Most of us apply for Instant Personal Loans because they are an ideal source of short-term funds with flexible repayment options. Another advantage they offer is the speedy disbursal time. Most banks and financial institutions credit the funds directly into your bank accounts. However, the main advantage that a Personal Loan offers is that it is unsecured, which means that there is no collateral or security required against it. For this reason, the rate of interest on a Personal Loan is considerably high.

This makes it all the more important to understand the various factors that affect the interest rate because the higher it, higher is the final amount that is paid to close the loan. The following are the factors that influence the interest rate of a Personal Loan:

  1. Your Credit History: Your credit history is an essential factor that banks look into while processing your Personal Loan application, as it reflects your repayment behavior for both your past as well as ongoing loans. Banks usually access your credit history and credit score from your Credit Information Report (CIR) that is prepared and maintained by CIBIL, one of the country’s important credit bureaus. Along with loan repayment, it also checks your credit card bill repayments. Based on your credit report, banks decide on the interest rate for your Personal Loan (or whether you even get one).
  2. Your Personal Income: While applying for any loan, banks look at whether you are earning the minimum annual salary required to be able to apply for the loan. The higher your income, higher is the likelihood of you repaying your loan EMIs promptly. This is also a critical factor for banks while processing your Personal Loan application, as there is no collateral or security involved. Individuals having a regular flow of income will be preferred, as it gives banks the assurance of the loan being repaid on time.
  3. Your Employer Brand: The brand reputation of your employer or the company that you work in also plays a part in determining whether you get a low or high rate of interest on your Personal Loan. This is because banks perceive reputed, well-established organizations as more likely to provide its employees with stable jobs, thus enabling them to clear their loans on time. Therefore, individuals working at well-known companies are more likely to get loans with lower interest rates.
  4. Your Association with Your Bank: You have a better chance of availing a low rate of interest on your Personal Loan if you have a good relationship/understanding with your bank and its representatives. This is more likely if you have been an active and loyal customer of that bank for a considerable amount of time, because, in this case, there is a degree of familiarity between you and the bank officials, and they would prefer that you transact with the rather than visiting another branch or a different bank altogether.
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