Major factors that affect Personal Loan interest Rates

There could be certain situations in life when health insurance, education loan, or liquidation of an asset may not suffice. In such cases, an instant Personal Loan could help meet those immediate funding needs. A Personal Loan is an unsecured loan that doesn’t require a borrower to pledge an asset as security. One should apply for a Personal Loan when he/she doesn’t want to compromise an asset and is confident of servicing and repaying the Personal Loan EMI on time. Instant Personal Loan application process, collateral-free funding, speedy approvals, and disbursals make Personal Loans attractive for both self-employed and salaried individuals. However, it is important to check for the lowest rate Personal Loan as the interest rate of a Personal Loan is the biggest factor in determining its EMI.

How is Personal Loan Interest Calculated?

Put simply, the interest of a Personal Loan is the premium charged by the lender for lending the money to the borrower. And this interest is calculated at a particular rate of interest which could be different for different lenders. A Personal Loan Interest Calculator helps you to know the interest that would be charged for a particular loan amount at a specific rate of interest.

A borrower needs to understand how this interest rate is calculated. The basic formula employed is:

Personal Loan Interest = Personal Loan Principal*Interest Rate of the Personal Loan

How is Personal Loan EMI Calculated?

Since the Personal Loan EMI is a factor of the applicable interest rate, the difference between a low or high-interest rate would directly influence the EMI amount. Hence, before you go ahead with the instant Personal Loan application, you should determine whether or not the EMIs are within your budget. This can be done easily online by using a Personal Loan EMI calculator.

The basic formula used to calculate the EMI of the Personal Loan is:

EMI = P x R x (1+ROI)^N / [(1+ROI)^N-1] where,

· P = Principal Loan Amount

· N = Loan tenure in months

· ROI = Monthly Interest Rate = Annual Rate of interest/12/100

What Factors Affect Personal Loan Interest Rates?

We now know that the EMI of a Personal Loan is largely dependent on the Personal Loan interest rate. We must also understand the factors that affect the interest rate.

Credit Score: A Personal Loan is an unsecured loan that doesn’t require a security to be pledged. This means that the associated risk for a lender is much higher than that for a secured loan. In case of a default, a lender can recover its money by liquidating the pledged collateral in a secured loan but no such recourse is available in unsecured loans. When you apply for a Personal Loan, your credit history and credit score are the first things checked by the lender. A good credit history means that you were able to repay previous loans or credit card debts promptly and this increases the lender’s trust in you. A good credit score, usually over 700, indicates good creditworthiness and increases your chances of instant personal loan approval. A good credit score can help you negotiate for the lowest Personal Loan interest rate possible.
Your income: Your income is also one of the factors for getting an attractive rate of interest on your Personal Loan. Banks charge a lower rate if you have a fixed and guaranteed income. Higher-income candidates are considered reliable due to their job security. Your income proofs like salary slips, ITR, etc. are the documents required to be furnished for availing of a Personal Loan. If you are a self-employed individual applying for a Personal Loan, your years in business should meet the eligibility criteria set by the lender. If your business income is significant, you can negotiate for a low-interest-rate Personal Loan.
Debt-To-Income Ratio (DTI): Put simply, a Debt-To-Income Ratio indicates the relationship between your outgoing monthly debt payments and your monthly income. In the case of Personal Loans, this ratio is used by lenders to determine whether or not you have the financial capacity to service the Personal Loan EMIs.
Your Employer’s Reputation: Most lenders calculate the eligibility of an applicant for a Personal Loan on the perception that employees of a renowned and reputable organization would have a stable career and steady income. They also believe that such employees would be able to pay Personal Loan EMIs on time and hence they could be offered lower Personal Loan interest rates.
Your relationship with the lender: If you have availed of a loan with a particular lender in the past and satisfactorily repaid the same, you can leverage that relationship. The lender views you as a creditworthy customer and you can negotiate for the lowest possible interest rate on your Personal Loan.

Instant Personal Loans available online have made it easy, fast, and convenient to borrow money. If you meet the eligibility criteria and maintain a good credit score, chances are you may be offered an attractive Personal Loan interest rate. Certain lenders provide Personal Loans with a low CIBIL score as well; however, the applicable interest rate could be significantly higher.