Here Are 4 Crucial Factors That Determine Your Personal Loan Interest Rate
Rising needs of average consumers have considerably enhanced the demand for personal loans. At times, many require instant funds to meet unexpected needs or emergencies. Here is where personal loans can rescue you. This option can allow you to arrange funds for holidays, weddings, higher education, medical exigencies etc. Unsecured nature, quick online processing and no restriction on fund’s end usage make a personal loan a preferred option for many.
While this loan option may appear alluring, there are various basic factors you must account take into account before you apply for a personal loan. Out of the many factors, personal loan interest rate is one of the major parameters you must consider as it determines your overall loan cost. Opting for a higher personal loan rate enhances your EMI and total loan cost while availing a lower rate may help you save on the overall loan cost. Note that you can instantly find out your savings using a personal loan EMI calculator.
Check out the major parameters that impact your personal loan rate:
Your income is the basic element that decides your loan rate. Earning a high disposable income infers higher repayment potential than those with lower disposable income. Checking your income is one of the crucial factors considered by lenders, which allows them to determine your repayment capacity. Having a high income tends to fetch you a lower personal loan rate due to the lender’s reduced credit risk than those with a lower income.
- Credit score
Credit score is an essential filter considered for determining your loan approval. In the case of a personal loan, credit score becomes more necessary as it is an unsecured loan that requires no collateral or security for its processing. With credit score, lenders assess your financial health in terms of existing debt, income, borrowing behavior, previous repayment record etc. Having a higher score enhances the trust level amongst lenders, which allows them to offer you lower rates on personal loans.
- Employer’s status
As a personal loan is typically an unsecured credit option, lenders may check your employer’s status to determine your credibility. The reason for lenders to check your employer is very simple i.e., if you work at a reputed company, you are looked upon as financially stable with a high probability of repaying your loan EMI on time. This allows lenders to offer a lower rate. However, if you work at a risky organisation or start up, you may be viewed as financially unstable and to compensate for this credit risk, lenders may charge a higher rate on a personal loan.
- Debt to income ratio (DTI)
Suppose you are working in a reputable company and earn a high income, but a major portion of your income goes towards debt repayments. In such a case, all your previous debts are likely to impact your personal loan eligibility and applicable interest rate. Debt to income ratio is the ratio of all debt repayments by your overall income. Higher DTI conveys higher debt burden and hence lenders might charge a higher personal loan rate to make up for the risk of lending you.
As personal loans are unsecured credit options, the rate of interest charged by lenders is based on factors that determine your creditworthiness. Having a positive impact on such factors enhances your chances of availing a lower interest rate.