Factors Affecting Personal Loan Interest Rates - Personal Loan Blog - Tata Capital

Factors Affecting Personal Loan Interest Rates

Mar 01, 2017

Given the ever-increasing cost of living, at times it becomes difficult to manage expenses efficiently. Often individuals are faced with a cash crunch, and borrowing seems to be a feasible option during such times. A consumer loan, also known as an unsecured loan, helps such individuals to fund their personal expenses with the intent to repay the loan along with interest.

The rate of interest is one of the main costs associated with the unsecured personal loan. Higher the interest rate, higher is the amount to be repaid and vice versa. Banks and lending institutions do not offer the same interest rate to all potential loan seekers. The rate of interest varies from individual to individual based on numerous factors like their credit score, income, job history, past loan repayment history, besides others.

Following are four aspects affecting personal loan interest rates.

  1. CIBIL score
    The individual's CIBIL (Credit Information Bureau (India) Limited) score is one of the most important factors taken into account for a loan application. Lenders conduct extensive checks on an applicant's CIBIL score to reduce the risk of non-payment as it reflects the past repayment history. If the borrower has a good credit score, lenders will award the applicants with a lower interest rate. Chances are that loan seekers may get a 0.25% reduction in interest rates if their CIBIL score is more than 800.
  2. Personal income
    Individuals with higher income and job stability have a higher likelihood of repaying the loan. Hence, lenders require loan seekers to meet their minimum annual salary requirements. As personal loans are unsecured loans, no collateral is provided against the loan. A stable income gives banks the much-needed trust that the loan will be repaid. Lenders usually reject loan applicants of individuals who do not have a consistent flow of income.
  3. Relationship with the bank
    Individuals are more likely to land attractive rates of interest if they have a good relationship with their banker. Banks provide lower interest rates to loyal customers with whom they have a good interpersonal relationship. These customers definitely have leverage on their side as banks would prefer maintaining those relationships rather than losing customers to a competitor bank.
  4. Employer brand
    The reputation of an applicant's workplace is also a contributing factor to the determination of interest rate. If the applicant is employed in a company that is not well-established and stable, the interest rate will be higher. Similarly, if the borrowers work at reputed firms, chances are that they may obtain a lower interest rate. This is because lending institutions perceive such individuals to have a stable career thus making them more likely to make timely repayments.

The above-mentioned forces are applicable based on an individual's capacity to repay. Additionally, interest rates are also influenced by external forces. If there is a rise in inflation, the interest rates are also to rise correspondingly. Additionally, government decisions like a change in the monetary policies also affect interest rates. It is necessary to keep these factors in mind before individuals apply for personal loans.