Whenever any lender offers a loan, it always comes with a risk on the part of the borrower and the lender. The lender takes the risk of not getting the repayment in time. Due to this reason, the interest is levied on the loan amount as compensation for bearing the risk. Along with that, the risk of inflation plays a negative role. Whenever you lend money at a particular time, the prices of goods and services may alter during the repayment time. Due to this reason, the personal loan interest acts as a protection against future inflation.
On the other hand, the borrowers need to pay the interest as they must pay the money to gain the ability to spend the loan amount. Even the business takes the help of loans to increase its future profit. The financial institution borrows money to increase the activity of investing or lending while paying interest to their clients for offering the service. However, one must understand these five driving factors that define personal loan interest rate.
- Debt to income ratio
Having a higher debt to income ratio means the inability of the borrower to pay the equated monthly instalment. Make sure that you have a balanced one.
- Reputation of the employer
If you can work with any reputed employer, it increases the chance of having attractive rates. Moreover, a secured job means that you will have better chances to pay back the loan on time. You must always take the help of an interest rate calculator to calculate your equated monthly instalment.
- Repayment history
The lender would also evaluate the repayment history for the past credit records. Only after that, they can offer you a small personal loan. If you have a clean credit history with no defaults and disciplined payments, it can help you get fast approvals. Every lender prefers to have borrowers with zero defaults within the past 12 months
- Credit score
Before approving the loan application, the lender will meticulously check the credit score. Credit score or CIBIL score reflects the repayment capacity of the borrower. Ideally, if you have a score of 750 and above, it can help you get the loan approval easily. Besides, it makes the process of getting a loan a hassle-free one. You need to be consistent with the repayments and payments of your credit card bills to affect your credit score positively. You must check your credit score regularly to avoid any discrepancies or errors.
- Monthly income
Whether you are a salaried employee or self-employed, your income matters when you want to take a small personal loan. It is one of the prominent factors that help determine the interest rate. Suppose your income is higher than you can repay the amount within the given time. It becomes easy for both the lender and the borrower. You can also calculate the personal loan interest with the help of an interest rate calculator.
If anybody is looking for a competitive interest rate on any personal loan, they should look for more than one lender. Only after indulging in the comparisons of various loan criteria, one can get the best interest rate. The lender also offers borrowers flexible EMI plans for small personal loans. The borrower can enjoy an extended tenor for at least 6 years in such cases. Besides, if any borrower wants to avoid all the paperwork, they must choose to take the loan from a personal loan app.