09 MARCH, 2022

A personal loan is an easily available and convenient option when you require funds. There is no collateral or security required for a personal loan. Attractive interest rates, easy repayment options like EMIs and tenure of your choice make it a go-to option for all your quick cash needs.

Unlike a home or car loan, personal loans do not have a common fixed interest rate for all. The interest rates in India varies for borrower to borrower depending on their profile and financial solvency.

Below, explore the key factors affecting personal loan interest rates for different borrowers.

  • Income Level

Your income determines the interest rate applicable to your personal loan. Those in the high-income category become eligible for a better and lower rate of interest simply because they are financially stable and thus, considered capable of repayment. For the lender to gain trust in the borrower, the income of a borrower needs to be above a certain minimum value.

  • Creditworthiness

Credit score plays a significant role in getting your loan approved. Your creditworthiness is calculated based on the CIBIL score, a numeric score assigned to every individual based on his/her credit and repayment data. It indicates the lenders of your financial performance about previously availed loans, credits. Normally, lenders prefer a credit score of 750 and above. Borrowers with a good CIBIL score are considered more trustworthy, and hence enjoy better rates.

  • Default and Repayment History

All of us have credit cards and loans from different institutions. Regular repayment history of these loans without delays or defaults makes you eligible for a lower interest rate on personal loans. Make sure that you haven’t defaulted in the last 12 months. Borrowers who have defaulted on any loan in the past have faced loan rejections or ended up paying hefty interest rates. Keep in mind that any default in the recent past is a red flag.

  • Debt-to-Income Ratio

You may be in a high-income bracket and may have a decent credit history; however, if you have a large debt obligation at present, compared to your income and net worth, you may not get a fresh loan or may get a high interest rate. Debt-to-income ratio is computed by dividing your debt payments out of your total income. A higher debt-to-income ratio means, a major chunk of your income is spent on debt payments. Hence, in such a case, lenders may charge a higher interest rate on a personal loan.

  • Employment

Since, personal loans are unsecured; lenders prefer factors like employer reputation as a crucial aspect in determining personal loan interest rates. If you are employed with a well-known organisation, your chances of getting a low interest rate increase. Lenders consider such employment as more stable as compared to lesser-known companies. Such employees are in a better position to service the loan in future.

Similarly, self-employed borrowers may get higher interest rates compared to salaried individuals. The length of employment with a company also plays a crucial role in determining your stability and reliability.

  • Relationship with the Institution

Lenders are inclined to offer good interest rates when lending to a trusted customer. Your loyalty to the existing financial institution wherein, you must have opened savings accounts, fixed deposits etc., will help you fetch attractive personal loan interest rates. A good customer is always preferred and can negotiate a better rate on a personal loan.

Keeping all the above factors in mind, you can enjoy competitive interest rates on your personal loan by building a good credit history, repaying your dues on time and having zero defaults. Evoke trust and the lender may offer favourable terms whenever you need money.

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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.