Personal Loans are unsecured loans that can be used for various purposes, such as vacations, weddings, higher studies, or any medical emergency. They are easy to apply for and are approved without much effort.
A Personal Loan interest rate is typically higher than secured loans like home or car loans. For example, home loan interest rates can start from 9.55%. Similarly, there is a different interest rate when you apply for a Loan Against Property.
Since Personal Loans are unsecured, they do not need any collateral. The lending institution sets the interest rate as calculated on the total loan amount and is based on your ability to pay it back.
What is the Annual Percentage Rate or APR on Personal Loans?
The Annual Percentage Rate (APR) reflects the yearly cost of the loan consisting of interest and fees. What counts extra in the case of APR is the origination fee, a one-time charge debited from your account after you receive the loan. The APR on Personal Loans varies (starting from 9.99%) on the amount borrowed from the lender.
While some lenders do not charge the origination fee, the interest rate is the same as APR.
Furthermore, various factors affect the Personal Loan interest rate. Let us discuss the top consequential factors affecting the interest rate on a long term Personal Loan.
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Credit score or CIBIL score
A credit or CIBIL score depicts your capacity to repay the borrowed amount. CIBIL score decides your creditworthiness. A score ranging from 300 to 900 reflects if you are worthy of getting a loan. A high CIBIL score ensures your chances of getting your loan approved. A credit score above 750 will enhance your chances of securing a Personal Loan.
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The financial profile of the borrower
The first thing a loan provider will check to decide your eligibility for getting a loan is your salary slip and income proof if you are self-employed. Most lending institutions follow the rule that the higher the income, the lower the interest rate. The reason is that the more your monthly earnings are, the more likely you will repay the loan on time.
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Eligibility for loan approval
Before approving your loan application, lending institutions usually check for several factors like your job profile, monthly salary or income, age, whether any previous loan is running, and the loan repayment data.
Notably, it is difficult for someone nearing retirement to get a loan because the interest rates will be higher if their loan application gets approved. Likewise, a low-income loan applicant has to pay higher interest rates as they pose a risk of non-payment to the lender.
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Debt repayment history
Lending institutions will always check your long-term Personal Loan repayment history before approving your loan. Therefore, you will likely get your loan approved faster if you have made your payments on time.
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DTI ratio
The debt-to-income (DTI) ratio reflects your loan repayment capacity. DTI ratio can predict the portion of the income that will be used to repay the loan. A lower DTI ratio helps the borrower get a loan at a low-interest rate.
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6. Relationship with the bank
Being a loyal customer and having an excellent interpersonal relationship with your lending institution can be beneficial when the interest rate of the Personal Loan is changing. Since existing customers always get first preference, you can make the most of it when this happens.
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Tax benefits subject to the purpose of loan
Even if you have a higher interest rate on your Personal Loan, you can still enjoy tax benefits on its repayments if you use the loan for home construction or business expenses. However, you should be able to produce relevant documents as proof.
Conclusion
Overall, factors like processing fee, loan tenure, interests, etc., can vary depending on the borrower’s CIBIL score, applicant’s property, and more, affecting your Personal Loan interest rate. So, enquire about different lending institutions and their different Personal Loan interest rates, and then go with the one that fulfills both your and your lending institution’s requirements.
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