Personal loans are the most effective solution to deal with unexpected expenses. It also helps you to achieve all of your legitimate aspirations. However, if you are unable to acquire this loan at a reasonable interest rate, the scenario will only result in debt. As a result, it’s critical that you understand the factors that influence your personal loan interest rates.
1. Credit Score/ Creditworthiness
A credit score highlights one’s creditworthiness. The factor plays a pivotal role in establishing your personal loan interest rate. The minimum and maximum credit score requirements differ with each lender. Some financial companies only lend to borrowers with excellent credit scores. However, some lenders will approve loans to customers with ordinary credit.
While evaluating your creditworthiness, the lender assesses the following factors.
Remember that if you miss even one EMI, the lender will reject your application. If they approve your personal loan, be prepared to pay a high-interest rate. Try using an automated payment option to avoid such a problem.
Credit utilisation ratios are often calculated through revolving lending products such as credit cards. Prepare to pay a high-interest rate if you regularly use more than 30% of your credit limit.
Credit History Length:
The length of your credit accounts is also considered by the lender. If you have an older account with a good payback history, you are one step closer to securing the offer you want.
Credit mix refers to the debt portfolio that comprises both secured and unsecured loans. If you have a secured mortgage loan or bike/used vehicle finance in addition to a credit card, your chances of securing a low-interest loan are high.
2. Debt-to-Income Ratio
Debt-to-ratio refers to the income that is going towards debt repayment. If you spend more than 50% or 60% of your income on debt repayment, be prepared to face a rejection of your loan application. It’s because if you are approved for a loan, you will have to pay an additional 5-10% of your income towards repayment. And the money you have left is hardly enough to fulfil your basic needs.
Lending to a profile that has a poor debt-to-income ratio carries a significant credit risk. And the lender imposes a high-interest rate to mitigate that risk. It assists them in recovering the majority of the money during the initial time. Use the following formula to calculate this ratio.
Debt-to-Income Ratio: Total Monthly Debt ÷ Gross Monthly Income
3. Income and Employment Status
Lenders assess your income as well as your employment status before sanctioning a loan. Are you confused? Because you were informed that you didn’t need a high income to get a personal loan? Don’t be that way. You can get a loan if you have a low income. But if you have a high income, you can get a personal loan with a low-interest rate.
Let’s take a look at what your employment entails now. Usually, financial institutions need applicants to have at least one year of continuous work experience, including six months with their current employer.
Frequent job changes convey the impression that you are a disorganized employee. The lender feels that even if you have a loan, you will quit your work. In the end, the circumstance will result in a debt default.
4. Loan Amount
Your personal loan interest rate and loan amount are interrelated. The larger the debt, the greater the credit risk for lenders. They charge a high rate to offset the risk.
However, the scenario may not always apply. If you have a strong profile and a good salary, you will easily be able to negotiate a better deal.
Personal loans are unsecured loans. So, why are you seeing this point? If you have a poor profile and still want to secure funds at a low-interest rate, putting up collateral is the best option.
It gives the lender assurance that they will not lose money if you default on your loan. If you are wondering what you can use as collateral, life insurance, fixed deposits, and valuable assets are all options.
6. Relationship with the lender
This is a critical aspect of securing a low-interest loan. If you have ever applied for credit with a lender and have always been punctual with your payments after approval, the lender will lend you at an affordable personal loan interest rate. They may also be able to provide you with a pre-approved loan.
Apart from that, such lenders’ loan processes are also pretty simple. It’s possible that you won’t need to submit any documents to get approval. This is because they already have all of your information and documents in their database.
In order to obtain an affordable personal loan interest rate, never overlook the above points. They are very crucial in deciding your interest rates, as well as personalloan terms and conditions.