Looking for a personal loan in 2022? You can use these versatile loans to meet a variety of needs – planning your dream wedding, funding your next vacation, paying for higher education, and so on.
So, what determines the interest rate your lender offers you? When calculating the final interest rate on your loan, the lender will take multiple parameters into consideration.
Let’s explore the factors influencing personal loan interest rates in 2022 and what you need to know about them.
This is one of the most important parameters that affects your loan’s interest rate. A higher income reduces the likelihood of a borrower failing to pay their EMIs on time. So, the higher your income, the more likely you are to get a favourable rate on your loan. This, however, will depend on the perceived risks that a lender identifies.
As a general rule, a stable income history signals financial stability to the lender.
A borrower’s credit score is used to assess their creditworthiness and overall financial health. Your credit score is important not only in determining the applicable interest rate but also matters for loan approval. Credit scores typically range between 300 and 800.
A low credit score may lead to a loan application rejection. A good credit score (around 650) fosters trust between you and a lender, translating to higher chances of loan approval with lower interest rates.
Additional Read: Factors affecting personal loan interest rates
A lender considers your existing debts to calculate the final personal loan interest rate. If you have major existing debt, your profile appears risky to a lender. This will affect your chances of securing competitive interest rates. On the other hand, if you have minimal liabilities, you stand to secure a good rate of interest.
History of Default
The term “default” refers to the number of times a person fails to make timely loan or credit card payments. When approving loan applications, lenders consider the history of defaults to assess a borrower’s profile. They base the interest rates on your track record. A candidate with a good loan payment history is likely to get a favourable interest rate.
Relationship with the Lender
Your relationship with a particular lender also helps you get a loan with an attractive interest rate. Thus, if you have a well-established relationship with a certain lender, you can negotiate better terms on your loan.
The current repo rate will also have a part to play in your personal loans’ interest rates. This is the rate at which the Reserve Bank of India (RBI) lends money to other financial institutions. If the RBI reduces the repo rate, you can get a loan at a lower rate.
Additional Read: How much Personal Loan Can I Get on My Salary?
Being aware of the above-mentioned factors will help you make an informed decision. You can use a tool like a personal loan EMI calculator to calculate monthly EMI based on applicable interest rates.
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