It is true that interest rates on personal loans are a bit high because of the inherent risk associated with these advances. Whether you opt to take an instant personal loan or a traditional personal advance, lenders provide these loans against zero collateral as security and only count in the individual’s borrowing profile. But did you know there are smart ways to negotiate this interest rate with your lender and get a loan that will not hurt your budget?
Since the reason for the high-interest rate on a personal loan is the high-risk factor associated with it, you can convince the lender of your payback capacity. A high credit score, low income-to-debt ratio, multiple sources of income, stable employment, an earning co-applicant, and several such factors can work in your favor in getting a reduced interest rate on your personal loan. You can work your way to get these advances at reduced rates of interest.
Thus, understanding of various factors that affect the interest rates on instant personal loans can help identify and rectify the essence of low-cost borrowing for every individual. Let’s check out all the crucial factors that impact the interest rate levy on your personal loan.
8 Crucial Factors That Impact the Interest Rates on Personal Loans
1. Monthly income of the borrower
The monthly income of an individual defines the amount they can afford to borrow. This is important for calculating the monthly EMI and how much they can afford to avail on an instant personal loan. The income should be sufficient to accommodate the EMIs payable each month towards loan repayment and not strain one’s finances significantly to impact their financial stability. A low-income application often attracts a high rate of interest if approved.
2. Credit score
The credit score of an individual indicates their creditworthiness based on their past credit records, including repayment patterns, credit dependency, types of loans availed, and other factors. It is ideal to hold a credit score of 700 or more when you apply for instant loan with your lender. Check for score suitability at least 6 months prior to applying so you get the required time to make necessary changes, and it reflects on your score rightly.
3. Borrowing and repayment habits
Your total borrowings and the repayment pattern you follow also contribute to your risk profile as a borrower. To carry leverage for interest rate negotiation on your instant personal loan, you must keep your existing borrowings low and must maintain a strict repayment habit with timely and full repayment of the dues, whether it is the loan EMIs, credit card bills, or any other recurring dues. You can also close a few of your existing loan accounts in case you have multiple loan accounts.
4. Debt-to-income ratio
Your debt-to-income ratio represents the total recurring monthly liabilities as a percentage of your total monthly income, and it is a crucial indicator of your overall repayment capacity. Ideally, the ratio, including your new EMI-to-be should not exceed 50% of your total income. Having to pay a large chunk of your salary as EMI makes you a high risky borrower, as in case of job loss or any other unforeseen situation, there is a fair chance of missing out on your EMIs or even going into default.
5. Credit utilisation ratio
Another personal financial ratio, credit utilisation ratio indicates the percentage of credit you use out of the total available credit and should not exceed 30%. Any utilisation of your total available credit beyond this mark indicates a high credit dependency and reduced reliability towards financial stability and management, thus attracting high rates. Also, do not use multiple credit cards as this too can impact your credibility.
6. Loan amount borrowed and affordability
The total loan amount you borrow and how affordably the repayment liability falls on your monthly income also contribute significantly to the final interest rate levy on your instant personal loan. It is thus ideal to keep your borrowing within your maximum loan eligibility even though your borrowing profile makes you eligible for a higher loan amount. You must also check the EMIs payable to ascertain repayment affordability. Lending institutions provide self-help financial tools like eligibility and EMI calculator to help you assess how much you can and should borrow for easy repayment.
7. Reputation of the employer
If you are a salaried individual applying for an instant personal loan, the reputation of the company/firm you are employed for contributes to your job stability outlook. Thus, if you work with an employer that is well-known as established, typically an MNC, a public or a private sector company, your chances of securing the advance at low rates of interest increase. Your employer’s reputation thus provides you with leverage to negotiate suitable rates on the advance.
All these factors combine to result in an interest rate on your instant personal loan turning out favourable or unfavourable for you. Make sure to check out the market-related factors, and work on the risk factors associated with your borrowing profile to ultimately avail a low rate of interest on the advance. If you have already availed the loan, you can still aim to reduce your interest rate levy by opting to transfer the outstanding personal loan balance to a new lending institution offering a low rate of interest.