Interest rate is among the most important factors that affect the borrowing amount in a personal loan. Furthermore, it has a significant impact on Equated Monthly Instalments (EMIs). Individuals can make repayments of their debt liability more effortlessly by getting lower personal loan interest rates. In fact, there are certain factors affecting the interest rates of personal loans, which you should know before availing this credit facility.

Factors Influencing Interest Rate for Personal Loan

The factors that affect personal loan interest rates are as follows:

• Credit Score

Credit score is a foremost factor that affects personal loan interest rates since it is an unsecured loan. Therefore, being a potential borrower, you need to retain an ideal credit score to avail a personal loan at a reasonable interest rate. This credit score is a three-digit number that indicates the credibility of an individual to opt for this loan.

You can maintain a healthy credit score by repaying debts, credit card bills, and other payments on time. Remember that having a CIBIL score of 750 or higher will ensure quick approval of personal loan requests, and you can also get some additional benefits from your lender.

• Income Stability

Another factor that affects the interest rates of a personal loan is the income stability of an individual. Having a steady income is an ideal way to get quick approval for a personal loan. This is because a stable income ensures that you have to bear less financial stress while repaying the dues. This way, it also lessens the risk of loan default considerably.

Having income stability enables you to negotiate with your lender for reducing personal loan interest rates. Yet, financial institutions give additional attention to salaried borrowers. Thus a salaried person from a reputable private organisation or MNC enjoys better loan offers than self-employed persons.

• Monthly Income

Among the eligibility criteria of financial institutions, there will be one regarding an applicant’s monthly income. Your monthly income helps a lender to judge if you are a risky borrower. Thus, having a higher monthly income ensures that you have the potential to pay-off the dues timely. Therefore, lenders may approve your loan request quickly at attractive interest rates on personal loan.

• Repo Rate

Another factor that affects the interest rate for a personal loan is the base rate of financial institutions. All lending institutions have this base rate for determining their rate of interest. In general, most financial institutions use the repo rate of the Reserve Bank of India to decide the borrowing charges.

Hence, when inflation occurs, lenders offer higher personal loan interest rates compared to a recession period. Hence, with the increase and decrease of this repo rate by RBI, the interest rate on personal loan also changes.

• Relationship with Lender

Financial institutions prefer offering reasonable interest rates on personal loans to their existing or loyal customers who have a record of clearing the dues timely and maintaining a healthy relationship with them. Therefore, at first, borrowers should approach their earlier lenders before availing a personal loan rather than a new lender in order to get the benefit of a lower borrowing rate.

• Existing Debts

Lenders consider the existing debt of an individual to compute the personal loan interest rate. If you have a higher debt liability while applying for a personal loan, your lender may not be confident enough to lend you the credit. They will consider you a risky borrower and charge a higher rate of interest.

On the contrary, if there are minimal liabilities, you may expect an attractive interest rate. Thus, it is necessary to clear the outstanding debts and pre-existing payments on time before applying for this credit facility.

Like the factors affecting interest rates on personal loans, it is equally important for an individual to check out the documentation process and eligibility criteria while opting for a personal loan.

Eligibility Criteria of a Personal Loan

Following are the eligibility criteria for a personal loan:

• The applicant must be an Indian citizen
• Age limit should be between 21 years and 67 years
• The borrower must be salaried or self-employed
• The applicant should be associated with a private or public sector firm or an MNC
• Should have a working experience of at least 3 years
• Must retain a CIBIL score of 750 or higher

Take a look at the necessary documents to avoid the last-minute rush.

Documents Required to Apply for a Personal Loan

Following are the documents required to apply for a personal loan:

• Identity proof (includes Aadhaar card, PAN card, passport)
• Address proof (includes Aadhaar card, electricity bill)
• Income proof (salary slips for last 3 months)
• Employee ID card
• Bank account statement for last 3 months

Primarily, lending institutions analyse the repayment capacity of applicants at the time of approving a loan request and deciding the interest rate. Thus, you should be cautious enough about the factors stated-above so that you can negotiate for a reasonable personal loan interest rate.

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