How are Personal Loan Interest Rates Fixed by Banks?
Last Updated : May 19, 2020, 2:04 p.m.
As personal loans are unsecured loans, they usually come with higher interest rates. The increased personal loan interest rate will take out a huge chunk of interest by the time the loan wraps up. It’s therefore vital to get the loan at a lower rate so as to decrease the Equated Monthly Installment (EMI) as well as total interest outgo. But you should first know how the bank decides about the interest rate. To help you know so, we have put all such details in this post. So, keep reading!
The income of the Borrower
Your source of income is necessary for the loan because it helps gauge your repayment capacity. The existing EMIs, credit cards and other monthly payments are reduced from the net monthly income to know the amount which will be used for the personal loan EMI payments. If you aren’t able to meet the expectations of the bank, there is an option for you to have a co-borrower. The co-borrower helps increase the loan eligibility and have the interest rate comparatively lower than the individual loan.
For example: When your income isn’t able to meet the income criteria. Then to assure the lender, you can have a co-applicant that could convince the bank to give you the desired loan. The co-applicant should be earning and have a good credit score to make you eligible for the loan.
Put a Halt to Your Credit Card Spendings!
It is necessary to use credit cards when it is needed. Otherwise, it may have a bad effect on your credit score. If a user uses a credit card over its limit or has the habit of consuming around 50%-60% of the credit limit then the score may reduce gradually. And a low credit score doesn’t make you an eligible borrower for a personal loan .
Now make sure your credit score is a good one and remains in the range of 700-750 and beyond. Use discretion while making purchases from your credit card. Optimized spending from the credit card will make the lender think about giving you the loan at a lower rate. Else, the loan quantum may reduce or you may have to pay EMIs at a higher rate of interest.
Check Your Credit Score
Every time you apply for a loan, the one thing you need to do is check the credit score . So, if you apply when you have a good credit score, you not only gain speedy approval but also get the loan at a competitive interest rate. But make sure not to check it frequently as that can decrease your score. However, you can do so at Wishfin, an official partner of credit bureaus such as CIBIL and Experian that provide credit scores to people in India, for free.
Employer Status
Applicants working in a reputed organisation have a good scope for a lower personal loan interest rate . As these employees are more or less assured of the job stability, the regular flow of income, a factor that lenders consider to set interest rates, can be greatly ensured. Whereas if the individual job stability doesn’t satisfy the lender, the borrower may have to pay the loan at a higher rate. Salaried individuals of government, private or multinational companies can apply for the personal loan and get the interest rate based on their position, income or the status of the company.