Today, many lenders in India adopt the concept of risk-based pricing for deciding your interest rate. According to this concept, your credit risk is analyzed before setting the rate i.e., lower rates are charged if you have lower credit risk and vice versa. Such risk-based pricing is relevant in the case of unsecured credit options like personal loan where lenders lack the underlying security to depend upon in the event of loan default from your end. As of now, the personal loan interest rate may widely vary between 8.90%-24% p.a. based upon your credit profile.
Here are 4 crucial parameters that may influence your personal loan rate and personal loan eligibility, both. A positive mark on such parameters may ensure faster loan disbursal at lower personal loan interest rate.
- Credit score
When evaluating your application for a personal loan, lenders make sure to factor in your credit score. If your score equals 750 and above, you are considered credible and hold higher chances of personal loan approval at lower personal loan interest rate. However, in case you have a lower score of below 750, you are generally considered lacking credit discipline with high credit default chances. To make up for this risk, lenders often charge a higher personal loan interest rate.
As personal loan requirements are unannounced in nature, checking your credit score right before clicking on the personal loan apply button on the lender’s online portal is of no use. You must develop the habit of periodically checking your credit report. Doing so will assist you to take the right steps to improve and maintain a good credit score. Regular review of credit reports also helps you to know any wrong information or errors mentioned in your report. In case of any discrepancies, you can report to the credit bureaus and concerned lenders for rectification. A rectified report can automatically enhance your credit score.
- Income
If you have higher income, you will be looked upon as a safer bet by the lender because of your higher disposable income. On the contrary, if you have lower disposable income, you will be looked upon as a riskier bet because of your higher default chances. Thus, many lenders may charge lower personal loan interest rates if you have higher income and vice versa.
- Employer’s profile
Your sources of income are also reviewed by lenders when fixing your personal loan interest rate. Usually, a lower personal loan rate is charged if you are salaried than self-employed. Among salaried categories, if you work in PSU or government sectors, you will be given higher preference owing to your income certainty and job security. Next preference is given if you work in a reputed private organization as such companies can witness economic downturns and are more stable in nature than the rest. Among the self-employed category, doctors and chartered accountants are given higher preference and have higher chances of securing lower personal loan interest rates.
- Relationship with the lenders
Preferential personal loan interest rate is provided to you if you are an existing customer of the bank/NBFC. Existing relationships can be in the form of current, savings, fixed deposit, recurring deposit, loan, or credit card account. Thus, if you want to take up a personal loan, you must start your search by approaching the financial institution with whom you have a lending or banking relation. The personal loan rate that they offer can be considered as a benchmark for comparing various personal loan rates offered by other lenders.
Conclusion
As procedure for evaluation of risk can vary from lender to lender, personal loan rate too varies widely for the same lender. Thus, make sure to compare the different personal loan offers by lenders before you make the final decision. One of the prudent ways to do so is to approach online lending markets to figure out good deals. Once you select your lender, use an EMI calculator to know your estimated EMI as per your repayment capacity and then, apply for personal loan.
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