Getting a loan can be a great way to meet any urgent financial needs. Be it a medical emergency or a high-end purchase, a personal loan can be the most affordable financial tool for all your needs. However, when you take a loan, you are essentially renting money from the lender. The rent you pay for using this money is charged to you in the form of interest rates. Though the interest rates offered by different lenders may vary by slight margins, the factors that contribute to the decision of interest rate remains the same. In this article, you will discover important insights on the factors that influence your personal loan interest rate.
Factors that influence your personal loan interest rate
- Amount of loan you seek
The amount of loan you seek plays a key role in how much interest rate will be levied upon you. Higher loan amounts are seen as high risk accounts because of which the lender might levy higher interest rates. For lesser loan amounts, the lender offers the loans at lower interest rates. Most lenders have a fixed interest rate for a particular bracket of amount. For example, the interest rate levied on Rs. 6 to 10 lakhs could be higher than that on Rs. 1 to 5 lakhs. Hence, you might want to check this before applying for the loan and if necessary apply for a lower amount to get a better deal on the interest rate.
- Duration of loan you seek
The tenure of your instant loan is also a key factor in deciding how much interest rate will be levied. Longer loans are generally considered high risk by the lenders and thus they try to cover their risk by charging high interest rates. A loan for a shorter tenure is considered best in all terms because it is lower risk, costs less and thus benefits both the lender and borrowers.
- Your credit history
Your three-digit credit score and detailed credit history play a very important role in deciding the rate of interest that you will be charged. People who have a good credit history and have a record of paying their loans on time will always get the best interest rates. On the other hand, people who have average or bad credit score are offered loans at higher interest rates. The lender tries to gauge the risk of lending money to someone based upon the credit score and thus it forms perhaps the most important aspect based on which your interest rate is decided.
- Your income
Your monthly income plays a very important role in the interest rate that the lender charges you with. While this might not be a direct factor, it works with how much are your other borrowings. If you have high income and have not borrowed too much, the lenders will see you as a low-risk borrower and feel confident about your repayment capability. This is why they would be more open to offering you the loan at comparable high interest rates. On the other hand, even if you have high income but as your borrowings tend to rise up, so will the interest rates for your further borrowings.
- Prevailing interest rates in market
The interest rates in the market rely in large part on the rates set by the regulators and central banking institutions. This is a global practice and is followed in almost every country. Understandably, if the base interest rates set up by the regulators are high, the interest rate that a lender will charge the borrowers will also be high, and the other way around. This formula applies on personal instant loan, home loan or almost any other kind of loan that is offered. Understandably this is also one factor on which the borrower has absolutely no control.
- Festive or promotional offers
Many times, lenders tend to run festive offers or other promotional offers during which they tend to charge promotional interest rates. These can have a significant impact on the interest rate. If you apply for a loan during this time of the year, you are more likely to get good deals because lenders have already prepared for this season and they have a war-chest for catering to the increased loan demand. Both conventional lenders and instant loan app tends to give loans as part of these festive deals.
- Nature of your lender
Generally, the conventional lenders tend to offer slightly higher interest rates because their nature of business involves high operational costs. Conventional lenders have to maintain a large number of physical locations and a huge staff that needs to be paid. The high operational costs of conventional financial institutions make it difficult for them to offer loans at low interest rates. On the other hand, when you borrow from a personal loan app, you get lower interest rates because they do not have to maintain big offices and huge staff. The use of modern technology allows them to run a cost-lean business and they can pass these benefits to borrowers in the form of lower interest rates.
- Your employer brand
This is one of the often ignored but very important factors which play a key role in deciding how much interest rate you will have to pay. Lenders tend to build preference tables based upon borrower employer because if employers are reliable, the borrowers will be reliable. People in government jobs tend to sit on top of this lender table, followed closely by people employed in top MNCs and reputed companies. They get the best interest rates. See, the lender has high confidence in these establishments paying their employees and thus they become lower risk lending prospects.
Conclusion
Broadly, it is the risk factor that largely determines your interest rate. If you are a low-risk borrower, one who has a good credit score, good monthly income, reputed employer, low debt-to-income ratio, and then the lenders are more open to offer you a loan at a lower interest rate. But for high risk borrowers, the lenders balance the risk with high interest rates. Apart from this, other parameters that might influence your interest rates are – market trends, and promotional offers.