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Top 4 factors influencing your personal loan interest rate
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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.
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Given that personal loans are unsecured in nature, they are easy to apply for and quick to avail. The availed loan proceeds can be used for any purpose like vacation, wedding, home renovation, medical exigency, higher studies, etc. When compared to secured credit options like car loans, loans against securities, etc., the personal loan interest rate may be slightly higher owing to its unsecured nature. Thus, before you hit on the personal loan apply button, it is recommended for you to compare different lenders and select the one providing the lowest personal loan rate to keep your Equated Monthly Instalments (EMIs) at an affordable level.
Discussed here are four important personal loan eligibility parameters that lenders factor in to determine your personal loan rate.
1. Credit score
Lenders consider your credit score to be one of the important parameters when evaluating your application for a personal loan. A score of 750 and above is looked upon as credible and has higher personal loan approval chances at lower interest rates. However, if you have a lower score of below 750, you may get a personal loan at a comparatively higher rate. In worst case scenarios, holding a poor score of below 750 may even result in loan application rejection.
As the requirement for a personal loan usually may come unannounced, assessing your score just before placing the application will be of no help. Thus, you should make sure to build a habit of assessing your credit report regularly and taking the required measures to improve or maintain your score.
2. Income
If you are an applicant with a high income and a debt-to-income ratio of less than 50%, then you may be a safer bet for the lender as these factors project your capability of timely repaying your personal loan EMI. Thus, you may be offered a lower personal loan rate.
In contrast, if you have a lower income with a higher debt-to-income ratio, then you may be looked upon as a risky applicant. Hence, to compensate for the risk involved, lenders may charge a higher interest rate on a personal loan.
3. Employer’s reputation and profile
You may not be aware that your employer plays a crucial role in getting your personal loan approval at a lower rate. While evaluating your personal loan request, many lenders even check your employer’s reputation to determine your income stability chances. Generally, lenders charge a lower personal loan rate for salaried than for self-employed.
Among the self-employed category, chartered accountants and doctors may have higher chances of securing a lower personal loan interest rate. Among the salaried, if you are a government or Public Sector Undertaking (PSU) employee, then you may be most favoured by the lenders because of job stability. You may also be preferred by lenders if you are employed at a reputable and large private company as they are looked upon as stable with a high potential to withstand economic fluctuations than start-ups.
4. Relationship with the existing financial institution
You may already have a relationship with a financial institution in the form of a savings account, fixed deposit, or recurring deposit. Such relationships may project you as a loyal customer. Due to such loyalty, you may manage to avail a personal loan at relatively lower rates than other loan applicants.
Ending note
As every lender has a distinct process of computing the personal loan rate, ensure to compare different loan offers before you place your final application. Once you have selected the suitable lender, ensure to use an online personal loan EMI calculator to compute the preferred personal loan EMI as per your repayment capacity and cash inflow.
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