Factors That Impact Personal Loan Interest Rates

There are many lenders that now follow a risk-based pricing concept for deciding the loan applicant’s interest rate. Lenders also charge higher interest rates from those with higher credit risk. For instance, HDFC bank charges higher interest rate of HDFC personal loan from those with higher credit risk and lower HDFC personal loan interest rates from those having lower credit risk. Remember that these kinds of pricing in loans become prominent when unsecured loans like personal loans are concerned. In the situation of personal loans, lenders have zero underlying assets towards which they can turn if the personal loan borrower defaults on the loan. Thus, the interest rate for personal loans differs between 8.9 % and 24 % p.a. based on the loan applicant’s income, credit profile, employer’s profile etc. Moreover, if the applicant is unable to meet the lender’s eligibility criteria, then he will also not be eligible for a top-up personal loan.

Here, we will first cover the latest personal loan table and then discuss major factors that the banks or NBFCs usually consider when setting the personal loan interest rate:

Personal loans are unsecured credit options that can be taken up by the ones who face financial shortages in situations of travel abroad, home renovation etc. or to meet financial exigencies such as medical expenses and others. Their quick processing, minimal documentation requirement and availability of proceeds with nil restriction on the funds’ end usage make the personal loan a preferred option among individuals with monetary mismatches. These loans usually are provided for repayment tenure of up to five years, with some of the lenders offering a higher repayment tenure of up to seven years. When applying for a personal loan, you should note to compare their interest rates and various other charges like processing fees etc., among various lenders. Also, check if the lender allows you to avail of a top-up personal loan in case you require more funds to meet the same emergency or any other financial requirement.

Listed below are four important factors that can impact the applicant’s personal loan rate:

Credit score

Lenders consider the applicant’s credit score to be an extremely important parameter when assessing his application for a personal loan. Those with credit scores of 750 & above & good credit history are often looked upon as creditworthy as they hold higher chances of availing loan approval at lower interest rates. On the other hand, as the ones with lower credit scores are looked upon as credit irresponsible individuals, lenders usually tend to charge higher interest rates to compensate for the higher credit risk.

As requirements for a personal loan generally come unannounced and thus checking your credit score right before submitting a loan application is of no help. Hence, consumers should ensure to inculcate the habit of timely reviewing their credit report and take corrective steps to improve or maintain their credit score. Such periodical reviews also help them find wrong data or errors present in the report and inform the credit bureau and lender for correction. Having a rectified credit report would increase your credit score automatically, which indirectly helps enhance your loan eligibility.

Income

Lenders provide higher preference to those applicants with higher income due to their increased disposable income. Those with lower disposable income are often looked at as individuals with higher default chances. Thus, most lenders tend to charge higher interest rates from those having lower incomes.

Employer’s profile

Many lenders even consider the income sources of applicants while setting their interest rates. Usually, lenders charge reduced interest rates from those salaried individuals than the self-employed individuals. Self-employed individuals are generally charged a higher interest rate as they hold higher default risk due to their uncertain income. Amongst salaried, the government employees and the PSU employees are highly preferred due to their job security and higher income certainty. They are followed by the ones employed in large reputed private companies because such organizations are mostly looked upon as extremely stable with high potential to witness economic downturns in comparison to other private companies. This reduces the lender’s credit risk perception, which makes them attract these employees by providing them with lower personal loan interest rates.

Existing relationship with lenders

Many of the lenders offer their existing trusted employees a preferential personal loan interest rate. Such relations can be in the form of savings, current, recurring, or fixed deposit accounts and can be in the form of other credit card or loan options. Thus, those thinking of choosing a personal loan should first start their search for a suitable lender by approaching the bank with whom they share an existing relation. Interest rates provided by them should be considered as a benchmark for comparison with personal loan rates provided by other lenders.