It is important to note that personal loans are among the most expensive loans on the market. They come with the highest interest rates since they are 'unsecured' – that is, they do not require any collateral. Personal loans are relatively high risk loans for lenders because they do not hold any collateral from the customer in case of default. In order to safeguard their money in case of default, they charge a high interest rate on personal loans.
Naturally, the interest rate varies with each bank or lender. The interest rate on a personal loan could typically range from 12 % to as high as 32% and is influenced by a variety of factors. Some of these factors are detailed below.
What Factors Affect the Interest Rate On Personal Loans?
Your borrowing history and credit score: Lenders look into your borrowing history in order to evaluate your ability to repay the loan. The general consensus is this - the higher your credit score, the better your interest rate will be. If you have a high credit score, it means you are a responsible borrower and lenders are confident that you will not default on your repayments and that their money is safe. With a good credit score and healthy credit profile, you might be able to negotiate a lower interest rate with your lender.
Your loan amount as compared to your annual income: Your loan amount is taken into consideration while deciding on the interest rate. If your loan amount is a small percentage of your annual income, then your interest rate will tend to be lower since lenders are assured that you will have the capacity to repay the loan. Conversely, if your loan amount is a high percentage of your annual income, then lenders might not be confident about your repayment capacity and might sanction the loan amount at unfavorable interest rates.
Your relationship with the bank. If you are a long-time customer with your lender and enjoy a healthy relationship, then you might be able to get a better interest rate. You will also be eligible for their special offers that might not be available to the general public. So make sure you get the best deal if you are an existing customer!
How to apply for a personal loan?
There are several ways to apply for a personal loan.
You can apply directly online at the bank/NBFC's website; or you can go in person to the branch with the required documentation; or you can contact the customer care department of your lender; or you can contact a sales agent.
If you want to apply for a personal loan with the lowest interest rates as applicable to your credit profile, then CreditMantri can guide you through the entire process and match you up with the loan offer best suited to your needs.