Personal loans are a viable loaning option for someone looking to finance their short-term financial needs. Personal loans are a perfect option to meet emergency cash requirements as it doesn’t require to be spent in a certain way. It can be spent on financing weddings, holidays, vacations, other events or medical emergencies.
Personal loans can be an attractive option for you, but before going forward with the borrowing personal loan. Certain factors need to be kept in mind before opting for personal loan. One such factor is CIBIL Score & the other is interest rate offered in personal loans. There can be a range of interest rates that mainly depends upon an individual borrower’s credit history.
Let us discuss all such factors that can affect the interest rate offered in personal loans:
Income of the individual: The borrower’s income plays a significant role in determining the interest rate in personal loan. It can be safely assumed that a person with high disposable income in hand would be in a better position to pay off his loan in time than someone with less disposable income. It implies that the higher your income, the lower the interest rate.
Disposable income is the income in hand that can be safely spent after deducting tax and other charges.
Credit score: Credit score is an essential criterion in facilitating the loan approval process. It is basically a 3-digit number issued by credit bureaus and is issued on the person’s credit history.
Generally, a credit score of 750 or more is considered suitable by the lenders providing loans. Here, no security or collateral is granted to the lender; hence they are at the risk of losing the money in case of non-payment. In such a scenario, the lender statistically analyses and evaluates the history before approving the loan. Hence, a person with a high CIBIL score has a higher chance of getting loan approval, while a person having lower CIBIL has a lower chance. Significantly, credit score is an essential criterion when judging loan approval.
The repayment or default history of the individual: It is similar to checking your credit score. The default history of the borrower is analyzed before approving the application. In case of bad credit repayment history, the loan would be granted but with a higher interest rate. Lenders prefer a clean credit history of the borrower on past loans.
Debt to Income ratio: This ratio determines the individual’s debt burden over his income earned. If you are a salaried individual who makes a lot but most of your earnings are utilized in paying certain debt, this will affect the interest rate on your personal loan. A person with a high debt to income ratio would mostly have a high-interest rate on personal loan compared to a person with a low debt to income ratio.
Employment status: If the lender considers your job to be secure or in a well-reputed organization, this assures your creditworthiness and help you win personal loan at low interest rate. In case of an unsecured personal loan type, this is a crucial criterion to judge the borrower’s creditworthiness status.
Relationship with the lender: Now, maintaining a loyal and long-term relationship with the lender is crucial as the lender trusts such borrowers and can be a bit lenient with them. This might also be the case for peer-to-peer lending of personal loans. As the parties know and trust each other after working together for so many years, they are more likely to get a better deal than a new customer.
This blog discussed various factors affecting the interest rate offered in personal loans. The loan rate can have a crucial impact on your ability to pay back the loan on time; thus, before opting for online personal loan, all these criteria should be kept in mind to save yourself from borrowing a loan at unjustified interest rates.