- How do Lenders Decide the Personal Loan Interest Rates for an applicant?
- Know about all the factors that decide the personal loan interest rates of a borrower
A personal loan is one of the most popular and preferred financial products among those individuals who are looking to fulfill their financial needs. These financial needs can be different for different people. With the help of a personal loan, an individual can get the required loan amount in a hassle-free manner by which he or she can fulfill their needs easily. This amount can be repaid within a maximum tenure of 5 years that you can choose according to your convenience. A personal loan can be taken from any of the several banks and financial institutions that offer the same.
Every lender charges a certain interest on the personal loan amount given to you. The interest rate tends to change from one lender to another and is one of the most important things to look at before choosing a personal loan. To make a better decision while choosing it, you must know about how personal loan interest rates are determined in India. In this article, we will be shedding some light on the overall process through which lenders determine personal loan interest rates for an individual. Keep reading this article to have some more knowledge about it!
Factors Determining the Personal Loan Interest Rates in India
To know the overall process of how the personal loan interest rates are determined in India, it is important to know about the factors that determine your interest rate. Before giving a personal loan to any borrower, a lender checks these factors and decides the final rate of interest for you. If you know about these factors in detail, you will also be in a better position to choose a suitable lender for you. Interest rates are directly proportional to your repayment amount. The higher the personal loan interest rates, the higher will be your repayment amount. These factors are your credit score, monthly income, employment type, loan amount, existing obligations, etc.
We have provided detailed information about all of these factors that you must check!
When we talk about the factors that determine the personal loan interest rate, the one factor that comes at the top of the list is the Credit Score of an applicant who wants to opt for a personal loan. If you are thinking about the reason behind it, let us tell you that a personal loan is an unsecured loan means you don’t need to provide any collateral or security against the loan amount. So, lenders face a lot of credit risk while providing the loan amount without any security.
A credit score tells everything about the overall repayment behavior of an individual. It generally ranges from a score of 300 to 900. An individual with a high credit score will certainly have good repayment behavior and debt management skills and vice-versa. So through the credit score, lenders determine the creditworthiness of individuals. People with a high credit score (above 700) are eligible to get lower interest rates on their personal loan as compared to people with a bad score.
So, according to the credit score of individuals, lenders usually decide the personal loan interest rate at which the individual will service the loan. By doing this, they can also minimize the credit risk they face while lending to borrowers.
An individual’s monthly income plays a huge role in determining the personal loan interest rate. Lenders want to make sure that an applicant will be able to repay the loan EMI on time. And in this regard, the first thing that a lender checks is the income you receive in a month. Based on your monthly income, your interest rates are decided. An individual with a high monthly income may get lower interest rates on the personal loan as this particular applicant has more probability of repaying the loan amount as compared to an applicant with low income.
Apart from this, individuals with high monthly income can get a higher loan amount as compared to others. Also, each lender has this fixed eligibility criteria about the minimum monthly income that an applicant must qualify. However, this changes from one lender to another. So, you can choose accordingly.
Existing Monthly Obligations
Apart from monthly income, an applicant’s existing monthly obligations will also come into play while deciding the personal loan interest rates of an applicant. Before anything, it is important to know what is the existing monthly obligation? Well, it is the amount that you are liable to pay every month via EMI. Suppose you have a home loan on your name for which you have been paying INR 20,000 per month as the EMI amount. So, this amount will be the existing monthly obligation.
A lender will check the Fixed Obligations to Income Ratio (FOIR), and on the basis of that, it will decide the rate of interest for you. This ratio tends to change from one lender to another. Usually, a FOIR of 40% or less is considered to be ideal for getting a personal loan with low-interest rates. Also, An individual with higher monthly income and less or nil obligations will have a higher priority to get a lower rate of interest.
Nature of the Employment
Both salaried and self-employed individuals can apply for a personal loan. But whenever an applicant applies, the lender always checks the employment type of that particular individual as personal loan interest rates tend to vary for salaried and self-employed professionals. A salaried individual with a long stay in a job and a good monthly income is more trustworthy when it comes to repaying the loan amount as compared to a businessman who has just started his business.
That’s why lenders always check the nature of employment the applicant is in and decide accordingly. There will be always some difference in the personal loan interest rates between salaried and self-employed individuals.
One of the major factors that help determine personal loan interest rates in India is the job or business history of an applicant based on the employment type he or she has. Before sanctioning the loan amount and finalizing the rate of interest, lenders always check the number of years since you have been working in an organization or your business has been running.
A longer employment history makes you a creditworthy applicant in the eyes of a lender. With this, you are more likely to get lower interest rates on your personal loan. Some lenders have these fixed eligibility criteria that an applicant must have particular years of work experience in the company to get a personal loan. More years of work experience can get you a much lower interest rate on the personal loan.
The lender also takes the reputation of the applicant’s organization into account while determining the personal loan interest rates. If an applicant is working in a reputed MNC then he or she is more considerate towards repaying the loan amount and can thus get the loan at lower interest rates. Also, sometimes, the applicant’s salary account can help in this matter as the lender can check the creditworthiness of that particular applicant through the salary account of an applicant.
Existing Relationship with the Lender
This is one of the most crucial factors that help lenders in determining the personal loan interest rates in a hassle-free manner. The existing relationship with your lender can determine your personal loan interest rates. For example, if you have been a good customer of the bank for years with a good repayment record then the lender can give you special offers on the personal loan facility such as a lower rate of interest.
If an applicant has an existing savings/current account or a credit card with the lender, the lender may also provide special personal loan schemes to the applicant. So, having a healthy relationship with your lender is quite important to get lower interest rates.
Before sanctioning the personal loan to any applicant, a lender always checks the residential stability of an applicant. It is one of those important factors that determine personal loan interest rates. If a person has been living in a particular place for a long period then the lender is more likely to trust him or her as compared to a person who had been changing his residence frequently.
By checking this factor, the lender only wants to check the stability of an applicant as in the case of a personal loan, lenders have nothing in the form of collateral on which they can fall back in case of any default. That’s why the lender asks for address proof from the applicant before sanctioning the loan amount.
Personal Loan Interest Rates of Top Lenders in India
Now, you must have enough information about the overall process of how personal loan interest rates are determined in India. Personal Loan Interest Rates generally range from 11% to 20% per annum and the final rate of interest will be decided for you based on factors mentioned above.
To give you an idea about the personal loan interest rates, we are providing rates of some of the top lenders in the table below. Take a look!
|Personal Loan Lender||Rate of Interest (in per annum)|
|State Bank of India (SBI)||9.60% - 13.60%|
|HDFC Bank||10.25% - 17.00%|
|ICICI Bank||10.50% onwards|
|IndusInd Bank||11.00% Onwards|
|Standard Chartered Bank||11%-12.50%|
|Tata Capital||10.49% - 14.25%|
|Kotak Mahindra Bank||10.25% Onwards|
|Bank of Baroda||10.00% - 15.60%|
|Punjab National Bank (PNB)||8.95% - 14.00%|
|Central Bank of India||9.85% - 10.05%|
How Do Interest Rates Affect Your Repayment?
One of the major reasons behind the importance of interest rates is the impact they create on your repayment amount or EMI amount. We have already told you before that the EMI amount would be higher with a greater interest rate.
That’s why any ignorance while choosing the interest rates can cost you a higher EMI amount. Apart from this, your credit score can also get affected if you miss any of your EMI. We are providing an example to understand how interest rates affect the repayment amount.
Suppose an applicant wants to opt for a loan amount of INR 8 lakh for a period of 5 years. In the below table, we are considering two interest rates. One is 10.75% per annum and one is 14.50% per annum. You can see the other details in the below table.
|Loan Amount||Tenure||Rate of Interest||EMI Amount||Interest Outgo||Total Amount Payable|
|INR 8 lakh||60 months||10.75% per annum||INR 17,294||INR 2,37,662||INR 10,37,662|
|INR 8 lakh||60 months||14.50% per annum||INR 18,823||INR 3,29,357||INR 11,29,357|
So, you can see from the results that a slight change in the interest rates can create a major difference in the EMI amount. That’s why try to choose lower interest rates in order to lower your repayment amount.