A lot of people apply for personal loans at one point or another in their lives. And while there are many aspects they look for in a loan, an attractive interest rate usually tops them all.
It’s natural to want the lowest possible rate on your loan. However, for that, you must learn how it is calculated in the first place.
Banks and Interest Rates
Every bank has its own range of interest rate that it follows when sanctioning the loans.
For instance, you can get an HDFC personal loan at an interest rate of 10.99% to 20.70%, ICICI loan at the rate of 10.99% to 17.99%, OBC loan at the rate of 10.65% to 11.65%, etc. These are the ranges that are different for each bank and are more or less fixed.
However, the rate that you will get, one that falls on the range for a particular bank is based on several factors. These are:
Believe it or not, your monthly income alone can make a big difference in the interest rate you get on your loan.
Generally speaking, banks are willing to reduce the interest rate if your income is high (Rs. 50,000 to Rs. 1 lakh). It’s not uncommon to see individuals with a low income get a personal loan at a rate as high as 16% to 20%. However, high-salary individuals that earn Rs. 1 lakh or more per month are able to get loans at rates as low as 12%.
Your CIBIL score is the first thing that the bank will check when going through your loan application. This is because it helps them gauge your creditworthiness.
So, on one hand, it’s extremely difficult to get a personal loan with low CIBIL score. However, on the other hand, if your score is high, then not only you can get a loan rather easily, but that too at an attractive rate of interest.
A personal loan can be of two types:
The first one, as the name suggests, is secured by a collateral which could be a house or a car, etc. However, the second one is not secured by any asset which makes it riskier from the lender’s perspective. This is because in the first option they can seize the car or house to get their money back if the borrower defaults. However, in the second option, it can be really difficult for them to get their money back if the borrower is unable to repay the loan.
In most cases, whether we talk about a private bank loan such as the HDFC personal loan or a public-sector bank loan such as the SBI personal loan, etc. if you opt for a secured loan, then you can get a lower interest rate compared to an unsecured loan.
Are you an old customer of your bank? Have you had a good relationship with them? Did you always pay your credit card bills, loan EMIs on time? If your answer to all these questions is “yes”, then whatever’s the standard rate for personal loans that they are offering, you might be able to get lower by negotiating, or maybe even without that.
When a person has a long credit history which is also good, then they are believed to have high creditworthiness. So, they can easily qualify for a lower interest rate.
Apart from your financial details, the banks also know about your current employment status and your past jobs. So, if you like to switch jobs frequently, it may reflect instability and lack of discipline, which is a negative point for the bank and can affect the interest rate you get.
Personal loans are not easy to get mainly because they are usually unsecured unlike home loans, car loans, etc. However, a personal loan with low CIBIL score is even more difficult to obtain. So, pay attention to all the factors given above, but most importantly- to your credit score.
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