Personal loans are ideal for meeting financial needs. But is your loan affordable? Well, that solely depends on the loan’s interest rate.
++As described above, the interest rate varies for a particular individual on a personal loan. The basic interest rate is 11%, which increases depending on how you get onto the lender’s eligibility criteria.
Below are the factors affecting your interest rate on a personal loan:
1. Monthly income
The interest rate depends on your monthly income. If you are self-employed or salaried, the lender will accept your application based on your monthly income. Therefore, a higher income means a higher chance of paying their loan.
The lender needs to know if they can trust you with their loan and find out how easy it is for you to repay them.
2. Debt-to-income ratio
You can calculate the debt-to-income ratio by dividing your debt payments by your total income. Spending a significant portion of your income on monthly debt repayments indicates a higher debt-to-income ratio. This lowers your loan approval chances and you may be charged a higher interest rate.
3. Credit history
Another major factor that affects the interest rate on personal loans is your credit history. A good credit history indicates that you can pay back your loan or credit card debts on time and regularly. A good credit history would be essential in lowering the interest rate on your loan.
When applying for a loan and checking your credit history is good, the lender thinks of you as a person who can pay the loan back quickly and, therefore, lends you the loan at a lower interest rate. If your credit history could be better, take the necessary steps to build your score and apply for a loan. A credit score of more than 750 is considered a good credit history, and lower would be regarded as average or bad. \]
4. Relationship with the lender
Trust is essential when looking to lower the interest rate on personal loans. When a lender/bank trusts you, or you are their authorised customer, it is more likely that they will give you a loan at a low-interest rate. This is hard to achieve as a new customer, but it is achievable if you possess a credit card and have a good payment schedule.
As a salaried person, if you are employed by an employer that is widely spread and well-known, you will likely get a lower interest rate on a personal loan. Working for a reputable and well-recognised organisation means you have a stable job and can repay the loan on time.