When applying for a personal loan, one of the main factors you must consider is the interest rate offered.
Posted on – 10:23 PM, Fri – 25 November 22
Hyderabad: A personal loan is one of the easiest ways to get money. Since there are not many restrictions on such loans, you can use them to meet your funding needs, whatever they may be.
When applying for a personal loan, one of the main factors you must consider is the interest rate offered. The lower the personal loan interest rate, the better. Why? Because low interest rates effectively reduce your financial obligations.
So, when you’re shopping for a personal loan, it’s crucial for you to ensure you’re getting the lowest possible interest rate. However, the likelihood of getting a good personal loan rate depends on a number of different factors.
Factors Affecting Personal Loan Interest Rates
Below is a brief overview of some of the most important factors that play a huge role in determining the personal loan rate that is right for you.
your credit score
The first thing a financial institution looks at when determining a personal loan rate is your credit score. A credit score is a 3-digit number, ranging from 300 to 900, that is used to determine your creditworthiness. The higher your credit score, the more reputable you are considered to be.
Financial institutions tend to favor individuals with credit scores of 700 and above, and are more likely to offer attractive personal loan rates. Therefore, if you are planning to apply for a personal loan in the near future, it is recommended to ensure that you have a score of at least 700 points or higher.
your income level
Another major parameter that affects the personal loan rate that applies to you is your income. Individuals with higher incomes are most likely to consistently pay their EMI obligations on time. Therefore, financial institutions tend to reward these people with lower loan rates.
Before applying for a personal loan, it is advisable to ensure that your income level is above the eligibility criteria set by the bank. This way, you can enjoy a more favorable interest rate.
your debt obligations
Many financial institutions also consider your existing debt and loan obligations when determining the personal loan rate that applies to you. The more debt you have, the more risky you are in the eyes of your lender. Therefore, to offset this increased risk, financial institutions often charge higher interest rates.
Conversely, individuals with little or no existing debt are more likely to receive a better rate. If you have too many debt obligations on hand, it is a good idea to clear some of them before proceeding with the personal loan application.
your employment status
Since most personal loans are unsecured in nature, financial institutions generally tend to favor individuals with stable employment. If you are salaried, long-term employment with a reputable organization can help you get good rates.
On the other hand, if you have a spotty employment record and frequent job changes, you may have to deal with higher interest rates. If you are self-employed, it may be to your advantage to have strong financial strength and a long-term track record of steady income generation.
Your relationship with the financial institution
If there’s one thing financial institutions value, it’s a good relationship with their borrowers. Since long-term customers tend to be more trustworthy in nature, lenders are often inclined to offer attractive personal loan rates. Therefore, to take advantage of favorable interest rates, it is recommended that you obtain a personal loan from a lender with whom you have an existing relationship rather than looking for a new lender.
Key Considerations When Choosing a Personal Loan
While interest rate is a very important factor to consider when applying for a personal loan, it is far from the only factor. In fact, there are various other factors you need to consider when choosing one. Let’s take a quick look at some of them.
repayment period
When shopping around for a personal loan, it’s important to choose one that offers flexible repayment terms. This will allow you to better structure your loan according to your ability to repay.
For example, if you wish to lower your monthly EMI payments, choosing a longer repayment term may help you achieve this. On the other hand, if you want to finalize and pay off your personal loan as quickly as possible, choosing a shorter term makes more sense.
Therefore, when applying for a personal loan, it is very important to choose a lender that gives you the freedom to choose your preferred term.
Fees Associated with Personal Loans
In addition to personal loan interest rates, there are various other fees associated with personal loans. One of the main costs you have to bear is the handling fee. Financial institutions generally charge 1% to 2% of the loan amount as a handling fee.
Other fees to be aware of are late fees, foreclosure fees, and partial payment fees. Before you formally accept a personal loan, be sure to read the various terms and conditions of the loan before signing.
Partial Payment or Early Closing of Facilities
This is another major factor you need to consider when choosing a personal loan; especially if you plan to cancel the loan. Lenders typically charge a percentage of the outstanding loan amount for early closing. Foreclosure fees are typically around 1% to 2% of the total outstanding amount. Likewise, if you plan to make partial payments to reduce your debt load, it is advisable to check with your lender first whether they offer this facility.
in conclusion
As a borrower, the personal loan interest rate is one of the most important considerations you have to consider when choosing a loan. It is always a good idea to compare multiple quotes before proceeding with your personal loan application. Doing this will help you secure a good deal. Also, remember to do a quick credit score check. Knowing your score can help you better understand your current credit situation.
