How are personal loan interest rates determined? Top 5 factors to know

Understanding these can help you access a cost-effective deal while getting the necessary funds. Read on to know the top five factors influencing personal loan interest rates.

1. Monthly earnings

Your income from your job and other sources, such as rent or freelancing, is an indicator of your financial health and, thus, your ability to repay a personal loan. Generally, a high monthly income makes you eligible for a higher loan at affordable personal loan interest rates. This is because lenders consider you a reliable borrower with a low risk of default. This automatically ensures that you are offered a competitive rate of interest.

Another way to get the most nominal personal loan interest rates is to work at a reputed organisation for a few years to showcase your employment stability. Here's another tip: if you are looking for the maximum personal loan amount a lender offers, ensure that your income is higher than the minimum cut-off.

2. Credit score

Good creditworthiness is undeniably attractive to lenders. The higher your score, the lower your profile risk, which makes you eligible for affordable personal loan interest rates. Credit rating agencies calculate this score based on your past borrowing and repayment history. The score gives lenders an overview of your credit behaviour and future repayment ability. As such, it becomes feasible for them to offer affordable rates to a borrower who has a high score since it means you have experience with different types of credit, have repaid credit on time in the past, don't have too much-existing debt and have a low credit utilisation ratio.

3. Existing credit

The total amount of EMIs you pay monthly contributes to your current debt. Lenders look into this to calculate your ability to repay a new loan. Lenders are more likely to offer you a loan at competitive personal loan interest rates when your credit obligations remain below 40% of your income, including your new personal loan EMIs. The logic here is the same - their risk is reduced as you are more likely to repay the loan on time if your finances are not strained.

4. Association with the lender

Your history with a lender also impacts the personal loan interest rates you are offered. If you have transacted with a lender in the past and showcased good financial responsibility and diligence, you are likely to be eligible for lower interest rates. Apart from that, lenders are more likely to roll out pre-approved offers if you are an existing or past customer. Such offers come with exciting and affordable deals to enhance your borrowing experience, including budget-friendly personal loan interest rates.

5. The loan amount and tenure

Even the amount you borrow and the duration you plan to repay the loan affect the personal loan interest rates that lenders offer. Firstly, the shorter your tenure, the more likely you will get lower personal loan interest rates. Your ability to repay is less likely to be impacted in a shorter time, and the lender's risk reduces. However, sometimes, lenders may also offer competitive rates on long-term loans. A lower loan amount may also result in a nominal rate as opposed to the maximum personal loan amount the lender offers, as it reduces their risk.

When you need the maximum personal loan amount available, it is important to be aware of these factors as your cost of borrowing may increase. So, try your best to get the lowest personal loan interest rates possible to save money. Before you borrow, use the personal loan calculator to check your eligibility for a loan and your potential EMIs to choose the best terms and the most affordable lender.

A smart option is the Bajaj Finserv Personal Loan, as it offers you up to Rs.35 lakh. With it, you can get the funds you need at competitive personal loan interest rates and flexible repayment tenure. Apply now to avail the best deal to finance your goals.