The loan rates determine the affordability of a personal loan. A higher interest rate can equate to a higher EMI and vice versa. However, scrolling through the interest rates on personal loans charged by various lenders does not solve your problem. This is because the same lender could levy a different interest rate for every individual.
Multiple factors determine the interest rate that the lender could charge you. So what can you do to get the best personal loan rates?
Read below to understand the factors which could be a deciding factor of the personal loan rates.
Income
If you earn a higher income, you have a high chance of getting a lucrative interest rate on your personal loan. The lender is interested in your capacity to repay the loan. A high-salaried individual instills trust in the lender, and this lets him attract better interest rates.
Employer Reputation
Surprisingly, your employer’s reputation also has a key role to play in the interest rate charged to you. If you work with a renowned organisation, then the chances are that you will get a better interest rate.
A renowned company is associated with a stable workforce and timely salary payments. The benefit of this is passed down to you when you go applying for a personal loan.
Fixed Monthly Obligation Ratio or FOIR
FOIR, or Fixed Obligation to Income Ratio, is the part of your income that you use every month to pay off existing loans and credit card bills. The lender would scrutinise this closely when processing your loan application.
FOIR is the ratio of your existing monthly EMIs and credit card dues divided by the monthly income. Your loan eligibility and the interest rate charged to you will be higher if the FOIR value is high.
Credit Score
The lender evaluates your credit score before he decides on an interest rate for you. The score is a reflection of your repayment history. In simple words, it states whether or not you timely pay your credit card bills, if you have defaulted on any of your repayments, or have delayed in paying the monthly EMIs towards a past loan.
An excellent credit score indicates that you are well versed in managing loans and repaying them in time. It is an indication of your financial health. If your credit score is high, it amplifies the lenders’ trust in you, increasing your eligibility for a lower interest rate.
Credit Utilisation Ratio
The ratio of the credit you’ve used and the total credit available to use is the Credit Utilisation Ratio. If this ratio is high, it indicates that you are highly in credit.
In turn, it poses a risk that you may have borrowed in excess without a planned repayment capacity. A low credit utilisation ratio shows that you are less dependent on credit, and thus your repayment capacity is higher, which lets you enjoy a lower interest rate.
Lender Relationship
If you had a good relationship with the lender in the past, this impacts the interest rate charged to you. Your historical financial data lets the lender assess the risks, and if you are a low-risk borrower, you can grab a low-interest rate on your personal loan.
Number of Loans Applied to Within a Short Time Period
If you have applied for loans with various lenders within a short time, this gets reflected in your credit report.
Too many inquiries are a sign of being hungry for credit, and this clearly shows that you are in desperate need of money. Lenders do not see this as a good sign, which depletes your chances of getting a loan at a lower interest rate.
Compare Interest Rates
It is always wise to compare the personal loan rates charged by various lenders to see who can give you the best price. A personal loan EMI calculator is just the tool that you need.
Critical in the figures and let the tool narrow down the personal loan lenders for you. It is essential to go through the lending terms and conditions and do not decide on a lender solely based on a low-interest rate.
To sum up, work on these factors to be eligible for a lucrative rate on your personal loan. A low-interest rate on your personal loan does end up saving a lot of money in the long run. It, thus, pays to work around the factors mentioned above, which could let you bargain for a low rate on your loan.
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