Among household financing options, personal advances have sustained their ground, receiving high demand from the borrowing segment through and through. Even during the major economic downturn as an impact of the pandemic, personal advances maintained their streak of continued demand, mostly from household borrowers.
Quite reasonably, these loans are extensively useful in fulfilling diverse borrowing needs of individuals, right from meeting personal expenses to making financing available for business investment. The low personal loan interest rates are also among the reasons why borrower preference inclines toward them.
It is good to be well aware of every aspect related to the interest rate levy on these loans as doing so will help assess the cost of your loan easily and also help save on your total loan liability. Below given is a detailed insight regarding the interest levy on these loans.
Interest Rates on Personal Loans – Know What’s Unique
A personal loan is an unsecured advance, and as such, carries a high lending risk for financial institutions. To cover for this risk, lenders thus tend to levy interest rates a notch higher than those for secured advances. Nevertheless, the notion regarding high personal loan interest rates is not entirely true and sticks by only as long as you haven’t worked on your borrowing profile.
Naturally, the rates levied are a decent reflection of the risk associated with your borrowing profile. The better you reduce this risk, the higher your chances of securing a low rate of interest on the advance. There are several factors that impact the risk associated with your borrowing profile.
Top Factors That Affect Personal Loan Interest Rates
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Credit history and score of the individual
Each individual carries a credit history stored with the credit bureaus that reflects their past transactions related to availing loans and repayments. This history is used to assign a credit score to the person, which ranges from 300 to 900, with a score above 700 suitable for borrowing.
If a person’s score stands at zero. It indicates nil borrowing from them previously. The credit score and history serve as an assessment parameter for lenders to determine one’s creditworthiness, and thus the risk associated with providing a loan to them. As such, keeping a high credit score associates low-risk profile, and thus a better chance of securing low personal loan interest rates.
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Income level
Personal advances also mostly come with a minimum monthly income requirement that is crucial to meet eligibility. A high income level is always appreciated and stands better chances for the borrower securing low rates levy.
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Repayment capacity
An individual’s repayment capacity is defined mostly by reducing the fixed monthly liabilities from the total monthly income earned. If you have minimal credit running and hold a high income, your repayment capacity should be high and easy to accommodate a new EMI towards the personal loan repayment. You can use an eligibility calculator to check how much you should avail as loan to easily afford the EMIs.
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Existing loans and advances
The existing loans and advances that you are servicing also pose a certain degree of risk to your borrowing profile. The higher your present credit running, the more difficult it will be to negotiate for a low rate. Thus, it can be suitable to repay small loans and advances before applying for a personal loan.
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Debt to income ratio
Debt to income ratio, also known as fixed obligation to income ratio or FOIR, is a ratio indicating your total monthly debt as a percentage of your total monthly income. Ideally, one’s FOIR should remain between 30 and 50% for them to hold healthy borrowing capacity. A higher ratio than this indicates heavy dependency on credit and keeps a high-risk borrowing profile, making interest rate reduction challenging. FOIR is often the ratio that lenders use to asses a borrowing individual’s repayment capacity. You can pay off some of your debts to bring your FOIR down.
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Credit utilisation ratio
The credit utilisation ratio is another interesting and useful parameter that lenders use to assess the risk associated with a borrower. This ratio indicates the total credit you have utilised on a monthly basis out of the total credit available. The ratio should not go above 30% for holding a low-risk profile as anything beyond it means the individual carries a tendency to depend on credit more than self-financing. You should thus stick to utilising not more than 30% of your monthly credit available.
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income stability and employer repute
Your income stability is also a crucial determining factor for the risk associated with your borrowing profile. Whether you are a salaried or a self-employed individual, the lender would assess how stable your income is. Plus, for salaried applicants, the reputation of the employer also holds a crucial weightage. If you are employed with a public sector undertaking, your chances of receiving the loan conveniently at low rates of interest increase.
A higher ratio than this indicates heavy dependency on credit and keeps a high-risk borrowing profile, making interest rate reduction challenging. FOIR is often the ratio that lenders use to asses a borrowing individual’s repayment capacity. You can pay off some of your debts to bring your FOIR down.
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Relationship with the lending institution
Applying for a loan with a lender you already hold previous relationship with only eases. The scope of securing the advance at your desired personal loan interest rate. It is ideal to approach a lending institution you have repaid a previous loan to in time and in full.
Aspects like the type of interest rate levy also impact the final rate applicable to the advance. These advances are offered under the fixed and floating rate system. That the borrower can choose between when deciding on the loan terms. Usually, the fixed rate system attracts personal loan interest rate levies that are a notch higher than the floating rates. However, floating rates can subject the borrower to the risk of market rates volatility. It is thus best to weigh in both the rate levy systems based on the existing and predicted market scenarios. And decide on a levy system accordingly to settle for a suitable rate on your loan.
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