Personal loan can be your saviour during financial emergencies and also for making your long-awaited plans like vacation or dream wedding real. While a lot of people are averse about taking personal loan for discretionary expenses, there are others who strategize their borrowings to avail personal loan at a lower interest rate.
The interest rate on personal loan differs for different applicants based on their credit score, income level and other factors.
Let us see what all factors affect the rate of interest on your personal loan-
1. Credit Score and Credit History- Banks look at your credit score as well as your repayment behaviour in order to decide whether you are credible enough for a loan. Those with a better credit score (750+) and good repayment record are likely to get personal loans at lower rates of interest as compared to those who have a poor credit score (below700). In case of very poor credit score, banks might reject your application altogether.
2. Level of Income- It might sound weird but according to the trends of banks and financial institutions, people with higher income are likely to score a lower interest rate than those with lower or unsteady income levels. People earning a higher income are considered to have better capability of repaying their loan and hence the banks offer lower rates to attract them. On the other hand, it is risky for the banks to lend money to those who have lower income levels as they might not pay back on time.
3. Relationship with the Lender Bank- If you have had a long-term relationship with the bank that you are approaching, chances are high that you would get the loan at lower rates. Customers with long-term relationship with the bank are considered loyal and hence the loyalty benefit comes to them in the form of lower interest rates when they apply for a loan.
4. Reputation of your Organization- The more reputable organization you work with, higher will be the chances of your loan being approved at an attractive interest rate. Those working with a reputed organization are considered more creditworthy by the banks and other lending institutions.
The factors mentioned above are important for deciding the rate of interest on your personal loan. So, the best practices to avail a low-cost personal loans are-
1. Improve Your Credit Score- If you have planned to take a personal loan a few months down the line, you should start working on your credit score from now. Pay your credit card bills on time, do not max out your cards and make regular payments towards other loans. If you have overdraft on any of your accounts, it is advisable to close it. A credit score of 750-900 is considered good by the banks and NBFCs.
2. Apply with Your Own Bank- The chances of getting a better rate of interest on personal loans will be high if you apply at a bank with which you have had previous banking relationship. Choose the bank where you have a savings account or a fixed deposit. The lender of your previous home loan or car loan will also be willing to give you an attractive interest rate on personal loans if you have maintained a good repayment record with them. Moreover, the application process at such banks would be easier and hassle-free.
3. Maintain a Steady Job- Changing jobs frequently is not considered a good trait by the lenders. So you must be working at your current organization for at least 1-2 years when applying for an unsecured personal loan.
If you maintain a good record with respect to the above three factors, you are likely to grab a better deal. The tenure for which you want to take the personal loan is also taken into account before deciding the interest rates. Longer the tenure, lower the rate you are likely to get.
In case you already have a personal loan with a bank but find it difficult to pay the high interest rates, you can transfer the balance to other bank. Lenders like ICICI, IndusInd and IDFC offer Personal Loan Balance Transfer facility. However, you must consider the foreclosure charges at your existing bank before availing this facility. The other way of getting a lower rate is to take secured personal loan. For this, you have to provide an asset as collateral. But if you are ready to pledge an asset, you might as well go for gold loan or other types of secured loans instead of a personal loan.
Puneet Sharma works as a guest lecturer in Delhi. He holds a B.Tech & MBA Degree from the UPTU. With extensive knowledge and experience in various financial products, he also works as a consultant in banking & finance domains wherein he offers advice to his clients in managing personal finance.