Personal loans are unsecured loans that are given for funding emergency and unplanned expenses. The interest rates on these loans depend on several factors including the amount of the loan, its duration, the credit worthiness of the borrower, and the prevailing lending rates. The interest rates on personal loans may vary from one bank/lender to another but generally are in the range of 8% to 25% depending on several factors. When you apply for a personal loan you will also have to pay a processing fee (generally a percentage of the loan amount) to the lenders.
Factors Determining Personal Loan Interest Rates
- The Cost of Borrowing- Banks and other lenders borrow money from each other or central banks for lending purposes. This cost of borrowing is the major deciding factor for the interest rate on personal and other loans. So, a reduction in the repo rates will lead to the lowering of interest rates on personal and other loans.
- The Creditworthiness of the Borrower-Lenders take into account the credit score or worthiness of a borrower for deciding the interest rate. A person with a good credit score has higher chance of repaying the borrowed amount on time and so the interest charged is lower than the rate charged for a loan given to a person with a low credit score. The credit score of a person reflects his willingness and ability to repay his loans, bills, and other liabilities.
- The Borrower’s Employment Status and Income– Borrowers having a stable income and a good employment status are less likely to default than the ones with not-so-stable income. Banks consider the borrower’s employment status and income before sanctioning a personal loan. A higher-income improves the chances of the borrower repaying the funds.
- Loan Duration– Lenders tend to make more money from loans of longer durations since the debt has more time to accrue interest. This is the reason why banks offer long-duration loans at interest rates that are comparatively lower than that of short-duration loans. You can use a personal loan calculator to calculate the EMI for various durations and choose the one that suits you.
- Relationship with the Borrower– Most lenders offer concessional rates to their existing customers. So, if you already have a bank account or a fixed deposit, or a loan account with a bank, you are more likely to get a personal loan at a lower interest rate.
- Age– The age of the applicant may also have a significant impact on the interest rates. Applicants who are nearing retirement may be sanctioned loans at higher interest rates.
How to Get Personal Loans at Lower Interest Rates?
Here are some tips to get a personal loan at lower interest rates:
- Maintain a credit score of above 700
- Apply for personal loans to banks with whom you already have a deposit or loan accounts
- Avail of the pre-approved offers from lenders and banks
- Keep track of interest rate concessions offered by lenders from time to time.
Instead of going for the lowest interest rate on personal loans, you should compare the total cost of borrowing by considering all the applicable charges on a loan. This includes processing fees, default charges, pre-payment fees or penalties, loan cancellation charges, cheque bounce charges, stamp duty charges, and other applicable charges. These charges add to the overall cost of borrowing.