As an average Indian consumer, the needs are growing daily, and you might want to take a personal loan. People often take personal loans to meet unexpected needs that arise in life. It can help pay tuition fees, organize events, weddings, medical emergencies, holidays and much more. Personal loans are unsecured in nature, but quick online processing is available. A few factors affect the personal loan interest rate, which is why it is better to know the criteria and factors that affect it.
Factors affecting personal loan interest rate:
Income is the first factor that determines the personal rate of interest. It is a universal truth that higher-income people have the repayment capacity for any loan compared to lower-income holders. The lender will check your income capacity before lending you the loan. The income can cause changes in the loan amount and interest rate of the loan.
● Credit score:
Credit score also plays an essential role in getting any loan. In the case of a personal loan, credit score becomes a vital factor. A credit score shows a person’s credit history about how timely they make their payments, the history of their repayments and much more, which gives assurance to the lender about your repayment capacity. A higher credit score shows the borrower’s sense of financial responsibility which also helps them in getting better lower interest rates.
● Employers status:
When you apply for a personal loan, the lender checks the employer’s status. They see the person’s creditworthiness and status before lending a personal loan. If an employee is from a well-known organization, they will have a steady income which will help them make timely payments.
● Debt-to-income ratio:
Suppose you are an employee or a business owner of a well-known organization, but a significant part of your salary goes into debt repayments. In that case, it is not considered good and might affect the personal interest rate. The debt-to-income ratio helps give a ratio of the debt payments divided by your total income. If you have a higher debt-to-income ratio, then it means you have more debt burden, and the lender might charge a higher interest rate in this situation.
● Relationship with the lender:
If you know the lender, then it might help you get a better offer on personal loan rate of interest because you are considered a trusted customer. The trust you build with the lender only happens after a period, as it takes time and develops over a longer period.
● History of defaults:
If a lender finds any default in your credit history, it might increase the interest rate or lead to the rejection of your loan application. Lenders prefer customers who have had zero defaults in the last year before applying for the loan.
These factors affect the personal loan interest rate and can also change the loan amount. You need to know about the factors that can lead to the rejection of your loan application or an increase in the rate of interest. It will help you in making a few changes so that it only affects your loan process a little.