5 factors that affect your personal loan interest rates

5 factors that affect your personal loan interest rates 

Meta: Personal loan interest rates are impacted by several factors. Knowing all about them can help you optimise your application to get the best deal possible. 


When comparing loans, your go-to tactic may be to shortlist those that have the lowest personal loan interest rates. This is a smart idea, as the personal loan interest rates impact the cost of borrowing. 


The tenor and the loan amount also play a role in this calculation, but you may want to focus on the rate offered. If this is the case, it can help to know more about your offers, and if there are ways to access better deals. 


As a borrower, you should always try to get better personal loan interest rates. Doing so saves you money and adds value to the experience. But to get the lowest rates, you must know all about the factors that affect the personal loan interest rates. 


To learn all about them, read on. 


Relationship with the lender

The personal loan interest rates on offer will often vary from customer to customer. This is because your relationship with the lender is taken into consideration. If you have maintained a long-standing relationship, you are likely to get a good deal. 


In fact, you may get special personal loan interest rates that are not available to regular customers. These are often presented as pre-approved offers, and are personalised to suit your profile.


So, if you want the best personal loan interest rates, check for an offer from a lender that you have dealt with in the past. These financial institutions are your best bet when it comes to getting low rates and favourable terms.  


Current debt-to-income ratio

Your debt-to-income ratio signifies how much of your income is already earmarked for existing debt. If you have a high ratio, above 50%, it means that half of your income goes toward debt payments. 


This is a potential red flag for lenders, and they may offer higher personal loan interest rates to offset the risk. So, if you want the best deal, apply for new credit only when your debt-to-income ratio is 30% or lower. 


This indicates that you can easily handle your EMI payments and that you have a good handle on your finances. Making such an impression is key to getting favourable personal loan interest rates.  


Income and job stability

Personal loan interest rates are impacted by your income and its stability. Lenders will only offer low personal loan interest rates if you can prove that you are creditworthy. Moreover, you need to have sufficient income to reduce the risk of default. 


Generally, if you have a high income, you are more likely to get better rates on your loan. This benefit is also applicable if you have a stable source of income. Common examples include a job at a government office or if you are a self-employed professional. 


If you are salaried, some lenders may consider your job tenor. Some lenders require you to have a minimum work experience of at least one year to qualify. This is a good rule to abide by in general, so avoid applying for a loan if you have just switched jobs.  


Credit score

Your credit score is a marker of whether or not you can handle debt. It is based on your history with credit and your repayment track record. Moreover, lenders require you to have a minimum credit score of at least 750 to qualify.  


This factor greatly impacts your personal loan interest rates, as lenders gauge your creditworthiness using this score. So, if you have a poor score, you are likely to get a high rate.  


Generally, you can only get the best personal loan rates if you have an excellent credit score. For instance, with a CIBIL score of 800 or higher, you will get special deals from lenders. In such cases, you may even negotiate for even better terms.  


Reputation of your employer

In some cases, your personal loan interest rates can depend on the reputation of your employer. Lenders will assess all the factors that impact your finances to determine whether or not you can make payments on time. 


So, if you work at a reputed organisation, you may get a better deal. In some cases, it can come in handy when negotiating too.


Besides these, the current economic climate does impact your personal loan interest rates too. For instance, during downturns, rates are usually lower, especially in the early stages. So, if you need a loan with the best rates, you need to plan wisely. 


Additionally, it is important that you scout for lenders with acceptable personal loan interest rates. You can get personalised loan offers online, and these help you secure the best terms.