The majority of people prefer personal loans as it has a flexible end-use. It is a collateral-free loan means one does not have to submit any kind of collateral or security to procure a personal loan. This is among the major reasons why personal loan has higher interest rates in comparison to other secured loans like a home loan or a car loan. A personal loan has its own set of benefits to the loan seekers and is quick and easy to avail online from the comfort of home.
One of the major elements that come with a personal loan is Interest rate which determines the EMI. There are two main types of rates of interest namely Fixed interest rate and Floating interest rate.
Let’s understand it in detail:
- Fixed Interest Rate: If you opt for a personal loan of fixed interest rate, then you will have to pay the same interest throughout the loan repayment tenure. For example, if an individual has taken a personal loan for 4 years, the rate of interest offered by the bank will remain the same throughout the tenure.
- Floating Interest Rate: On the other hand, the floating or variable interest rate is linked to the Marginal Cost of the Lending Rate or the MCLR, thus results in the flexible interest rate as per the MCLR changes.
Both the type of interest rates has their benefits like if you go with a fixed interest rate then you will know exactly how much you will be charged during the loan period. Thus, those who want to plan their finances can personal loans with a fixed interest rate. However, if you don’t mind a fluctuating or flexible rate of interest, you can go for a floating/variable interest rate. The major benefit of opting for a variable interest rate is that your repayment amount will reduce when the rate of interest will low.
What is meant by Reducing the Rate of Interest concerning Personal Loan?
A personal loan at a flat interest rate, the interest is calculated based on the loan amount throughout the loan repayment tenure. In comparison, if you avail of a loan at a reducing interest rate/reducing balance rate structure, the rate of interest is only calculated based on the outstanding loan amount. Thus, in this case, when you pay EMI, the interest for the remainder of the loan period will be calculated on the outstanding loan balance.
Every bank or NBFCs has its interest rates like HDFC personal loan interest rate for salaried individuals ranges from 10.75% to 21.30%, whereas the Axis Bank personal loan interest rate ranges from 12% to 24%, but is not same for everyone. So, if you are planning to avail a personal loan, it is important to understand the factors that may influence the interest rate. Depending upon the following factors two people may get a different rate of interest on a personal loan from the same lender:
- Credit score: A good credit score not only helps you to avail a personal loan but also contributes to reducing the interest rate. A credit score is a 3 digits number that shows how you have handled the repayments of your credit cards and personal loans in the past. Every time you repay the EMI on time, points are added to the credit score and defaults or late EMI payments narrow down the credit score by a few points. It is important to maintain a good credit score of 750 or above, as it reflects your creditworthiness and presents you as a reliable individual in consideration of personal loans by the lenders. Hence a lower rate of interest may be offered to you.
- Income: As personal loans are collateral-free loans and do not involve any security against them and a high monthly income works as an assurance to the lenders. Almost every lender believes that high-income borrowers will be able to repay the loan on time, hence offer a lower interest rate to them. For example, if a borrower with a monthly income of Rs. 90,000 might get a personal loan at the interest rate of as low as 11% but on the other hand, a borrower with a monthly income of Rs. 25,000 might get a rate of interest of 14% from the same lender.
- Nature of the Employment: Personal loan lenders may offer different interest rates to the applicants based on whether they are self-employed or salaried.
- Age: The age of the loan seeker can also have an effect on the offered rate of interest by the lender. Individuals who are nearing the retirement age (like 58 years) may be charged a higher rate of interest.
- Employer Details: If you are working with a reputed company, you are most likely to crack a good deal on your loan rate of interest. This happens because loan providers believe that such borrowers have a stable job and constant income and hence would be able to repay the EMIs on time.
- Relationship with the Lender: If you have a salary or a savings account with the bank and share a good credit repayment history, the bank is most likely to offer you a personal loan with a low rate of interest or processing fee. The bank might also offer you some additional benefits.
How to avail of a Personal loan at a Low Rate of Interest?
Availing a personal loan is simple and quick but availing a personal loan at the low-interest rate might be challenging if you don’t consider the below-given points before applying for a personal loan.
- Improve Credit Score: As mentioned above, it is crucial to maintain a good credit score of 750 or above as it reflects your creditworthiness. A good credit score convinces the lenders to offer you a personal loan at a low-interest rate. If your credit score is below 750, you will have to make some extra efforts to improve it. The simplest ways to do so are to keep paying the EMIs of the existing loans and credit cards on time and keep checking the credit report for any defaults.
- Pay Existing Debts: The DTI (Debt to Income Ratio) is calculated by dividing the monthly debts by one’s monthly income. DTI is also taken into consideration by lenders to determine the applicant’s ability to manage the monthly EMIs along with the other expenses. If your DTI is more than 50%, you may not get considered for a loan or the lender may charge a high-interest rate. Before applying for a personal loan, it is always advisable to pay all the existing debts to narrow down the DTI ration. This will ultimately help you to get a low rate of interest.
- Compare the available offers: Don’t go with the first personal loan offer you get or see. It is always good to compare interest rates offered by various lenders on a personal loan and then go for the lender offering the low-interest rate. Also, never forget to compare the other hidden charges and terms & conditions as well.
- Apply with a co-applicant: If your credit score is not good or below 750, lenders might sanction your loan but at a high-interest rate. Under such circumstances, you can apply for a personal loan with a co-application having a good credit score of 750 or above. In this way, the financial information of both the co-applicant and you will be considered and you might get a low rate of interest.
Consider Pre- Approved offers: Lenders may offer you a pre-approved loan after considering the repayment history. When such an offer comes from the lender, a lower interest rate might be offered because the lender has already analyzed every aspect. So, keep looking for a pre-approved personal loan offer.
