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09 AUGUST, 2021
Personal loans can provide access to quick cash. You may use the loan proceeds for any purpose, whether it’s a medical emergency or just a vacation. The good thing about a personal loan is that it doesn’t require collateral.
Since personal loans are unsecured, the processing times are low. However, a lender perceives unsecured loans as riskier than secured loans. This could translate to a relatively higher interest rate. Therefore, it’s essential to study your options well when searching for personal loan options with the lowest interest rates.
Four Ways to Reduce Your Personal Loan Interest
A lender considers several factors while deciding on a rate that should be offered to the borrower. You can positively influence these factors by taking some corrective actions.
Your lender will check your credit score to establish your creditworthiness. A credit score of 750 and above can help you secure a good deal when you apply for a personal loan. If your credit score isn’t all that good, you can always fix it. However, you can’t fix it overnight.
Start by checking your credit score, seeing if there are any discrepancies in the report, and getting them fixed right away. Ensure that you maintain a credit utilization ratio of 30% or less on all your credit cards. Also, pay your EMIs on time to help keep your credit score on the higher side. If you’re a guarantor or a co-signer on another person’s loan, monitor their account for missed payments. If they miss a payment, it will impact your credit score, too.
A lender looks at your repayment history, among other things, to come up with your personal loan’s interest rate. Repayment history doesn’t just include your EMIs. It includes all your debts, including outstanding balances on your credit card. Even not paying a credit card bill on time also reflects poorly on you.
On the contrary, it increases the lender’s confidence if you have a good repayment history. It assures the lender that you’re financially disciplined. Therefore, good repayment history is critical for scoring a low-interest rate for a personal loan.
One of the first things a lender will assess in your application is your repayment capability. If your debt-to-income ratio is high, a large portion of your income will go towards servicing your current debts.
You’re left with little disposable income to pay off any new loans you acquire. Consequently, the lender perceives your loan as relatively high-risk. This may result in a higher interest rate on your loan or rejection of your application.
You can negotiate a lower interest rate with your lender if you strategically pay off some of your current debt. Prepare a list of your debts and sort them in order of the interest rate they charge. Start by paying off the loan with the highest interest rate. This will help you increase your disposable income faster than paying off a loan with a lower interest rate.
If paying off your current debts isn’t a viable option, consider refinancing or a balance transfer. If you have a loan that charges a high-interest rate, you may approach another lender. A different lender may be willing to offer a lower interest rate if your financials have improved over time.
Interest rates for an unsecured loan like a personal loan tend to be higher than secured loans. If you’re about to apply for a personal loan, you could use these tips to get the best personal loan interest rates. Even though a decrease of one percent interest rate looks small, it can still translate into significant savings in the long run.
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