What Parameters Affect Personal Loan Interest Rates?

By Author: Shashank Bhaskar
Total Articles: 36
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Many rely on Personal Loans for various purposes. It is easy to find a lender with numerous banks and financial companies offering the Loan. But every Loan is personalised. While many external factors such as economic growth, inflation, recession, changes in the monetary policy by the RBI, and economic uncertainties play an integral role in deciding the Personal Loan interest rates, several factors related to the borrower also affect the rates.
In this article, we discuss these factors:
Monthly income
Lenders should be convinced that you are earning a sufficient income to repay your equated monthly instalments. Typically, lenders offer Personal Loans to those making a minimum monthly income of Rs. 25,000 or an annual income of Rs. 3 lakh. Those earning higher incomes are ideal candidates since they are more likely to repay the Loan, without defaulting on EMIs. Such borrowers are rewarded with the lowest Personal Loan interest rates.  
Stable employment
Personal Loans ...
... are unsecured. To repay it, the borrower needs to be stably employed. Lenders prefer borrowers who are employed for three consecutive years without any gaps in unemployment. These people can negotiate rates offered by lenders. On the other hand, those prone to changing jobs frequently are considered unstable and quoted higher rates.
Credit score and history
Lenders need details about your credit behaviour, i.e., how frequently you apply for Loans, whether they are repaid on time, any defaults in repayments, whether the request was ever rejected, etc. These details are consolidated in a document called a credit report. Borrowers with scores of 750 points and above are more likely to get lower interest rates for Personal Loans.
Meanwhile, Loan applications get rejected, or higher interest rates get quoted to those with scores lower than 750 points.
Loan amount
When applying for a Personal Loan, you need to be sure of the amount as you it is unsecured, and no collateral is provided. If you opt for a higher principal loan amount, be ready to pay a higher interest rate. Longer loan tenures also warrant higher interest rates.
Multiple factors affect Personal Loan rates driven by your background, requirements, and the income group to which you belong. While some aspects are not within your control, the external factors mentioned are within your control.