People take personal loans for various purposes, which justifies the interest rate. Many require personal loans because bigger expenses have become a financial burden for the common person. A typical personal loan interest rate ranges from 10.50% to 24% p.a., different on the loan terms and conditions and other factors.
To avail the lowest rate of interest, see a few points below:
Keep a timely payment track record
The main deciding factor of the interest rate in the personal loan is the credit score a person has, which is decided by the timely and the lapsed payments done by the person. If the payment is always on time, the credit score is higher, and the interest rate will be low and vice versa.
Compare interest rates
One should always check the interest rates of other banks and NBFCs and then go for the desired interest rate in the bank that provides the same.
Talk to the relationship manager
Whenever you go to apply for a loan in the bank, always first try the bank in which one has their account and talk to the relationship manager. The bank can lower the interest rate if the savings or current account is well maintained.
Lower your interest on offers
At the time of festivities, banks and financial institutions often offer special interest rates for a limited time. One can even apply for a loan during this time to avail of the lower interest benefits.
Improve your credit score
One needs to always check their credit score and credit history before applying for any loan, as the credit score determines the eligibility and rate of interest. If one has a credit score above 750, they are charged with the lowest interest rate, while people with a credit score near 600-650 are charged with a higher interest rate. Thus, improving the credit score can get a lower rate of interest.
Other Factors that influence Personal Loan Interest Rates
Income: Income determines the interest rate, as a higher income provides a lower interest rate. In comparison, a lower income provides a higher rate of interest as the threat to the bank for default in case of lower income is higher than that of the higher income.
Employment Type: Banks prefer salaried professionals over the business owner while providing a better interest rate.
Age: The applicant’s age is also a major factor in the loan sanction department, where people below 35 are given a lower interest rate than those above 35.
Types of interest rates
Fixed rate of interest and Floating rate of interest
Fixed-rate of interest
As the name suggests, a fixed interest rate is constant throughout the loan period and is most beneficial to ascertaining the EMI repayments. The fixed interest rates are higher than that of flexible interest as they must remain constant even in the event of inflation and are not linked to MCLR (Marginal Cost of Funds Based Lending Rate). And even if one forecloses the loan, they will be charged foreclosure charges.
Floating rate of interest
As the name suggests, a floating rate of interest changes as per the repo rate of RBI and thus is variable. Banks do not charge customers if they decide to foreclose the loan in case of floating interest rate as it is linked to MCLR (Marginal Cost of Funds Based Lending Rate). A floating interest rate can lower your repayment amount when the interest rate is low.
To avail of the floating rate of interest, one must also keep in mind the other charges which are levied minimum in case of fixed interest rate, such as –
Every bank and NBFC charges processing fees on loans, varying from 0.5% to 2.50% of the total loan amount.
There are various other charges such as Cancellation Charges, Foreclosure charges, EMI default charges, Stamp duty charges, Duplicate statement issuance charges and other charges which can burn a hole in one’s pocket. These charges can be omitted with better planning and options, saving a lot of money.
If you pay your loan before the tenure, certain financial institutions can charge for the due period as pre-closure charges, where a portion of the outstanding loan amount is charged to the person before closing the loan account. Some banks have these charges while some do not; one should enquire before getting a loan.
To Sum Up
Thus, the above factors drive the interest rate of a personal loan and keeping them in mind will enable a person to avail lower rate of interest.