Key Factors Affecting Personal Loan Interest Rate

*This is in partnership with Bajaj Finserv.

At some point in our lives, we must have encountered an unexpected financial crisis, whether it's a medical bill or covering tuition costs. Going through a financial strain is one of the most distressing situations one can face. Nevertheless, in today's digital age, obtaining financial support has become simpler than ever before. Wondering how? Through personal loans! 

While personal loans can help you out of a jam, the interest rates attached to them can vary significantly. Understanding what affects these rates is key to making an informed decision. In this article, we will discuss some of the essential factors that influence personal loan interest rates, so you can explore your options better.  

1. Credit Score

As the name suggests, a credit score is an assessment of your creditworthiness. This is one of the first things lenders look at when assessing your loan application. It reflects your overall financial discipline by highlighting your credit history and repayment habits. It basically shows how well you have managed your debt in the past. 

The higher your score, the lower your interest rate is likely to be. This is because a low credit score shows that you have that you're a higher-risk borrower, meaning you could be offered a higher interest rate, whereas a high credit score shows you are less likely to take any risks, resulting in better interest rates. Nowadays, you can check your credit score through a personal loan app with just a few taps on your phone. 

So, now you know improving your credit score is the key! 

2. Loan Amount And Tenure 

The loan amount you request and the repayment period (tenure) can also influence your interest rate. Generally, smaller loans or shorter tenures are considered less risky, because the lender assumes that since it is a small amount, you will return it timely, leading to competitive interest rates. Whereas, if you have applied for a large amount for a longer period, the lender may consider it risky and can increase the interest rates. This is primarily done by the lender due to the increased risk of potential fluctuations in your financial circumstances. You can easily explore your loan options through the personal loan app. 

3. Income And Employment Type

Lenders prefer borrowers who have a stable and reliable income source. Stable income and employment assures that you will repay the loan amount to the lender. Therefore, having a stable income can increase your chances of getting a loan with lower interest rates. However, if you are someone with an unstable job and income, you might have to face higher interest rates, as you are seen as a high-risk borrower. Furthermore, make sure to have proof of income or employment when applying for a loan.   

4. Debt-to-Income Ratio

Do you know that Debt-to-Income ratio (DTI) is a metric used by lenders to assess your ability to repay your loan? This ratio compares your total monthly debt payments to your gross monthly income and gives the lender an insight into your financial situation.  A higher DTI ratio indicates that you have a high debt, whereas a lower DTI indicates that you have enough income to manage additional debt comfortably. Nowadays, you can easily track and manage your DTI ratio with the help of a personal loan app, which can provide personalised recommendations based on your financial situation. 

5. Market Conditions

Interest rates are also influenced by broader economic factors, such as inflation and the overall condition of the financial market. Usually, when there is inflation in the market, the lenders tend to raise the interest rates to maintain their margins. This means even if you have stable personal circumstances, the interest rates for personal loans can fluctuate based on the economic climate. It is extremely important for you to keep an eye on the market conditions, as this will help you find the best deal.  

6. Lender’s Policies

Different lenders have different policies and criteria for setting interest rates. For instance, if you have a good credit score, you may get competitive interest rates with an online lender in comparison with traditional banks. Whereas, if you have an existing relationship with the bank, like a savings account or fixed deposit, you can leverage this and negotiate the interest rate amount. The personal loan app can be a great tool for comparing different lenders and rates to make the best choice for your needs. 

Wrapping Up

Securing a personal loan with a reasonable interest rate is not a challenging task. It just requires a careful understanding of how various factors impact the rate you’ll be offered. Knowing some of the basic things, such as keeping a solid credit score, you can improve your chances of landing a better offer.

If you’re looking for a personal loan with competitive rates and hassle-free approval, consider Bajaj Finserv. With flexible terms, quick approval processes, and easy online access, it can help you manage your finances better, giving you the financial stability you require.