If you are currently looking for a personal loan, you may have noticed that interest rates vary from bank to bank. Simply put, the interest rates you’re offered are a reflection of risk. If a bank identifies risk, it charges a higher rate of interest.
Since the interest rates determine your overall loan costs, it’s useful to know what banks consider when deciding interest rates. Knowing the factors can help you get the best deal on your loan. To help you out, here are some parameters which affect personal loan interest rates.
Income
For banks, high-income borrowers are always the safest bet. Why? Because a higher income translates to a better loan repayment ability. Specifically, banks consider income relative to debt. For instance, if you have a sizable income with little obligations, you might bag a lower rate as you have more disposable income.
On the other hand, banks might not forward you a loan if you have a low income with many obligations. However, certain banks such as IndusInd Bank enable you to apply for a personal loan with a minimum monthly salary of Rs. 15,000.
Credit Score
Your credit score is a reflection of how effectively you manage your debt. With a strong enough credit score, you can obtain loans quickly without undergoing any hassles. But did you know that banks offer lower personal loan interest rates if you have a higher score? Yes, by maintaining a good credit rating, you can hit two birds with one stone – faster loan approvals and lower interest rates.
One way to bump up credit scores is to pay all your loan EMIs and credit card bills on time and in full. By doing this, you’ll be on a fast track towards better credit scores, and hence, better loan terms.
Employer Reputation
Yes, the reputation of your organisation matters! If you are working with a trusted company, you can procure a better deal on personal loan interest rates. The reason is quite simple – banks perceive employees working at reputed organisations to have stable careers and income, making them less likely to default on payments.
If you work for a small company or start-up with a low employee size, banks will likely charge you higher interest rates. The same goes for self-employed individuals. Needless to say, if you’re nearing retirement, your interest rate is bound to be higher.
Loan Payment History
Apart from your credit score, banks also take a good look at your loan repayment history before approving your application. If you have a high number of defaults, it reflects poor loan repayment ability, translating to higher interest rates. Banks usually offer you better interest rates if you don’t have any defaults in over a year.
The Relationship with Your Bank
Like any relationship, a long relationship with your bank builds trust. If you’ve been a loyal customer of a bank for a long time, chances are, they’ll reward you by offering you discounts on interest rates. So, before you start shopping around, you should get in touch with your bank to see if you qualify for any loyalty benefits.
Final Word
Now that you know the factors that influence personal loan interest rates, you can use this info to negotiate your way to a better rate. With lower interest rates, you can easily fulfil your desires without draining your savings!