You must be aware of specific loans offered by financial institutions like Home Loans, Vehicle Loans, Business Loans, Education Loans, etc. But are you aware of a multipurpose loan? Well, we are talking about Personal Loans.
A Personal Loan is an unsecured financial product that is easy to apply for and get online almost instantly. It can be used for various purposes, such as family weddings or funerals, medical and hospitalisation bills, international vacations and higher education fees.
Since Personal Loans are unsecured and don’t require any collateral, the risk level of the lender is much higher. For this reason, lenders charge a higher interest rate on Personal Loans. However, Personal Loan interest rates vary based on several factors. If you meet all the eligibility criteria and provide favourable results in other measurement metrics, your lender can offer you the lowest interest rate.
Factors Affecting Personal Loan Interest Rates:
Through the decades, Personal Loans have established themselves as the most versatile solutions for financial needs. Lenders don’t restrict or monitor how you use the loan fund once they sanction it, as long as you repay the loan EMIs on time. You can say you’re borrowing the money, for instance, for a home renovation. But if there are excess funds, you can use the money to buy your favourite gadget or take a short vacation.
With all the benefits of personal loans, you must overcome several challenges and restrictions. Before starting the loan application process, ensure you meet your lender’s requirements and eligibility criteria. Also, compare multiple lenders to find the one whose personal loan eligibility criteria most closely meet your unique needs.
Let us look at financial institutions’ top parameters to measure Personal Loan eligibility.
- Monthly Salary:
Providing income statements proving you have a steady income is the leading ask from most financial institutions. Borrowers providing high-risk financial solutions will be more confident in borrowers with a low probability of defaulting on loan repayments.
This is why any lender uses minimum income eligibility as a criterion for Personal Loans. If your in-hand salary exceeds Rs. 20,000 per month, you are eligible for a Personal Loan under this parameter. Most lenders’ minimum monthly salary requirement ranges between Rs.25,000 and 50,000.
- Repayment discipline and credit history:
A borrower’s repayment history is another critical factor in ensuring a borrower will repay the borrowed amount on time. The better your credit history, the lower your risk level while borrowing, and the lower your interest rate will be. Timely loan payments also indicate financial discipline on the borrower’s part and assure the lender that there’s a low chance of payment defaulting. To better understand your loan repayment schedule, you can use a personal loan interest rate calculator to find a loan amount, EMI and tenure that fits your budget without disrupting your lifestyle. Another way to ensure regular payments is to create a separate budget for your loan payments and set up Autopay or a payment reminder so that you don’t forget.
- Past relationship with the vendor:
If you have interacted or transacted with a vendor in the past, approaching them for a Personal Loan could benefit you as they already have your credentials. Of course, if your past interaction did not go well and you defaulted on your payments, you could find it harder to get a low-interest rate. If you are taking a Personal Loan from a financial institution where you already have an account, they know your details and credit histories. They will provide you with lower than market Personal Loan interest rates.
- Credit history or credit score:
A borrower’s credit score is the most important parameter while determining their creditworthiness. Any lender will look into your credit score before approving your Personal Loan application. A credit score is made up of all the data related to your past credit behaviour. A credit score of 750 or more proves your credibility and assures your lender that you won’t default on your payments. This results in them providing you with a low rate of interest. To keep your credit score high, ensure all your bills and loan EMIs are paid on time, particularly around the time you wish to take a loan.
- Economic, social and political factors:
Besides your personal credit history, several other factors will affect your interest rate, which you cannot control. Factors like recession, inflation and repo rates significantly impact your total loan expense. The repo rate is directly proportional to the interest rate charged by the financial institution. It is the rate at which a financial institution borrows money from the Reserve Bank of India. During inflation, lenders charge higher interest rates to discourage people from taking loans, while the opposite is true during a recession.
Things to Consider Before Taking a Personal Loan:
- Make sure you have a high credit score:
If you have existing loans or credit card bills to pay, make sure every payment is made on time to ensure a strong credit history. This improves your credibility before your lender by increasing your credit score. You can then get a Personal Loan at a lower rate of interest.
- Compare enough Personal Loan providers:
Before you shortlist or finalise lenders, compare as many Personal Loan providers in the market as possible. This will give you a more holistic perspective on loan eligibility criteria, interest rates and other elements forming the most significant chunk of your Personal Loan expense.
- Evaluate your total loan expenditure:
Your Personal Loan repayments will typically extend from 6 months to a year. Make sure you don’t take a loan too high otherwise, it could become a financial burden.
To check your loan application status or creditworthiness, get in touch with Clix Capital team today.