Lenders Consider These Factors While Setting Personal Loan Interest Rates

For anyone who needs immediate financial assistance, applying for a personal loan can prove to be an effective solution. Applicants do not even need to step out of their houses to apply for these loans; they can simply do so by visiting the lender’s website on their smartphones!

While applying for a personal loan is quite simple, it is very important to first make sure that the loan can easily be paid off. This is where one needs to focus on the personal loan interest rate that the lender is offering. Now, there are multiple factors that lenders consider while setting the interest rate. Take a look at these factors to understand how personal loan interest rates are set:

• Monthly income 

Lenders consider an applicant’s monthly income while evaluating their application for a personal loan. This is to understand whether the applicant will be able to clear the loan without any financial difficulties. If the applicant has a low income, they become a high-risk case for the lender, which is when lenders are likely to increase the interest rate of the loan. Keep in mind that lenders have a minimum income criterion, so make sure to check this before applying for the loan. 

• Credit score 

Any financial institution will check an applicant’s credit score before offering them any type of loan. An applicant’s CIBIL score is an indication of how well they manage their credit, based on which lenders decide whether to approve or reject their loan application. A low credit score can have an applicant rejected for a loan or get stuck with a high personal loan interest rate. It is considered ideal to maintain a credit score of 750 or more. 

• Previous repayment history 

One of the most important factors that lenders consider while looking at a loan application is the applicant’s previous repayment history. If the applicant has repeatedly failed to make timely payments on previous loans, it is quite likely that the lender would either reject their loan application or charge them a high personal loan rate. 

• Market factors

Apart from the applicant’s profile, lenders also consider the economic climate as well as additional market factors such as recession, inflation, and even the current repo rate set by the central bank. A lower repo rate would mean lower personal loan interest rates and vice versa. Now, these are factors that are beyond the applicant’s control; however, it is better to apply for a loan during a period when the interest rates are lower. 

So, keep these factors in mind before applying for a personal loan. You can make use of a personal loan EMI calculator to understand whether the loan’s interest rate is affordable by assessing the estimated Equated Monthly Instalment (EMI) amount.  This calculator will require details such as the loan amount, interest rate, and repayment tenure. Using these details, the personal loan EMI calculator will provide the EMI amount, based on which you can decide whether to go ahead with the loan or look for a better alternative.