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Personal loan Interest rates - How are they affected

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Personal Loan

The rate of interest is the main thing people consider when applying for a personal loan. Personal loan interest rates can vary from bank to bank. However, the interest rates that are offered by banks or National Non-Banking Financial Companies (NBFCs) depend on various criteria. The criteria for availing a personal loan varies depending whether it is being availed from a bank or an NBFC. The interest rates for personal loans fluctuate and can from 11.50% and go up to 15%. There are different interest rates for salaried and self-employed individuals. Therefore, if you are in the process of applying for a personal loan, it is important to know the factors that affect the interest rates.

Given below are some of the factors that affect the interest rates of personal loans:

  • Status of the company: An important factor that affects the interest rate of a personal loan is the status of your company. Since a personal loan is an unsecured loan, banks and lenders will need to trust you when providing one. Therefore, the type of organisation that you work for is considered by NBFCs and banks. Depending on the type of category your company falls under, the interest rates would vary. If your company comes under a higher category, the chances of you getting a personal loan at a lower interest rate are much easier.

However, the interest rates are higher if you work for low-category companies or start-ups.  Working at reputed companies can also help in getting a better deal when it comes to personal loans. Banks and NCFCs consider individuals working in a reputed company to be more stable, and more likely to repay the Equated Monthly Instalments (EMIs) on time. If individuals are near their retirement age and wish to avail a personal loan, they will be charged a higher interest rate.

  • Income: One of the most important factors affecting the interest rates is your monthly income. Since individuals need not provide any collateral/security when availing an unsecured personal loan, banks and NBFCs decide the applicant's loan eligibility and interest rate based on their income. If your income is high, the chances of getting a personal loan at low-interest rates increase. Lenders may also consider you as more likely to pay EMIs on a regular basis given your high income.
  • Credit score: Your credit score and payment history are important factors that are considered by banks and NBFCs when they determine the interest rates on your personal loan application. Individuals who have defaulted in their payment history usually have a low credit score. The credit score of an individual can range anywhere between 300 and 850, but a good credit score is that of 750 or above. Individuals with a good credit score can avail a personal loan with low interest rates. However, the interest rates are higher for individuals with a low credit score.
  • Relationship with the bank: The type of relationship that you have maintained with your bank also determines the interest rate when availing a personal loan. Those who have a savings/salary account or a credit card with a particular bank, may be in a better position to negotiate for special interest rates on their personal loan application. Banks offer their customers with lower rates in order to retain them. Therefore, having a good relationship with your bank can help in reducing the interest rates when availing a personal loan.
  • Negotiation: If you have an account with a bank for a long time, you are more likely to have a good relationship with the bank. Under such circumstances, when availing a personal loan from the bank, you can negotiate the fees and interest rates.

Conclusion 

The factors mentioned above can have an impact on the interest rates individually. Therefore, it is vital to understand these factors when applying for a personal loan so that you will be able to get the best deal possible. It is important to compare various banks and NBFCs that offer personal loans in order to choose the right one. There are various third-party websites where personal loans from different banks and NBFCs can be compared.

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