Major factors that affect personal loan interest rates

Published: 31st December 2022 01:02 PM  |   Last Updated: 03rd January 2023 11:17 AM   |  A+A-



It is important to maintain a good credit score and a fair debt-income ratio to get the lowest interest rates

Personal loans are becoming popular for instant financing in India. And by understanding personal loan interest rates, you can take a cost-effective decision while borrowing a loan. A personal loan interest rate is the rate at which the lender offers you the loan. It determines the amount of interest you will have to repay in addition to the principal amount borrowed. Thus, it is the deciding factor dictating the cost of borrowing. Interest rates in India vary for each lender and depend on how well you meet the loan eligibility requirements. When you meet most of the lender's qualifying terms, you can get a lower interest rate and vice versa. However, there are other forces at play here too. 

Read on to know more about the factors that affect personal loan interest rates

Your income

Your income is a critical factor that affects personal loan interest rates since it impacts your ability to repay. So, when you showcase good repayment ability, you are considered as a low-risk borrower. This makes you eligible for better personal loan interest rates. Lenders have minimum income eligibility criteria that you need to meet based on your area of residence. Generally, metro cities have a higher minimum income criterion for a personal loan. Apply after you meet this requirement to improve your chances of getting a pocket-friendly loan.

Employment stability

As a salaried applicant, the personal loan interest rate you get also hinges on your job. There are two ways you can showcase your work stability – through your employer's reputation and your years of service. Working for at least 2 years with a reputed employer helps lenders view you as having a stable career with the ability to repay any debt on time. This factor makes you eligible for a better personal loan interest rate.

Credit score

A high credit score is vital in getting you competitive personal loan interest rates. Generally, a CIBIL Score of 750 or above is ideal for availing of affordable personal loans. This 3-digit score reflects your creditworthiness. A high credit score results from paying debts on time, not borrowing too much or too often and not depending on credit too much. As a result, lenders consider you a borrower with a lower risk of defaulting and offer you lower personal loan interest rates. 

Debt-to-income ratio

Your debt-to-income ratio is one thing you can monitor to boost your credit score apart from the timely repayment of any debt. It helps lenders understand how much new credit you can handle. If you have a high ratio, you may have less dispensable funds for repayment, increasing your risk of default and making you a high-risk borrower. Unsurprisingly, this makes lenders hesitant about approving your loan application or offering you nominal personal loan interest rates. Ideally, you should maintain a debt-to-income ratio of 40%, which means your debt should be at most 40% of your total income.

Market conditions

Market conditions significantly affect whether you can get competitive personal loan interest rates. While this is outside your control, all you can do is try to borrow at a time when the personal loan interest rate is more pocket friendly. However, this can only work if you can plan your expenses and borrowing. 

Any lender's personal loan interest rate is linked to the RBI's repo rate. As such, a low repo rate could mean lower interest rates, and a high repo rate could result in higher interest rates. The repo rate is affected by numerous factors, such as inflation, recession, monetary policies, and more. Being aware of this can help you make an informed decision before you borrow and safeguard your financial well-being.

Now that you know about the factors that affect interest rates, go ahead with a personal loan application only after you compare the rates offered by various lenders.  You can even use a personal loan eligibility calculator to check if you qualify for the personal loan.

Lenders such as Bajaj Finserv offer online personal loans at nominal interest rates. Borrow a loan amount of up to Rs. 35 lakh and get the funds in just 24 hours*.You can even use the personal loan EMI calculator to plan your loan efficiently.Check your offer today and avail of a personal loan with minimal paperwork.

*Terms and conditions apply

Disclaimer: This content is part of a marketing initiative. No TNIE Group journalist is involved in the creation of this content.


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