Five factors that affect the interest rate on Personal Loan

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These days people prefer to avail personal loans to arrange funds for holidays, weddings, organising events, tuition fees, medical emergencies, project renovations, etc.

Even though a Personal loan provides many benefits for people, there are still some factors you should take into your account before applying for it. The personal loan interest rate varies from one lender to another.

Before applying for a personal loan, you should be aware of factors that affect interest rates. Read the article to learn about the factors that affect the personal loan interest rate.

  • Income

Income is a basic element of the borrower determining the interest rate on a personal loan.

  • According to a simple rule, the person with a higher and more stable income will pay less interest on a personal loan.
  • So, income is another important factor that decides whether you pay less or high interest on a personal loan.
  • Credit score

Credit scores play an important role in the approval of a personal loan. Every lender checks your credit score or history before providing you with a loan.

  • If your credit score is not good, the lender will possess a high interest on your loan amount or even reject your loan request.
  • So, it is important to build a good credit score to take a personal loan at a low-interest rate.
  • Employer status 

As we know, personal loans are unsecured types of loans. So, the lenders will make look at other factors to ensure the creditworthiness of the applicant.

  • Your employment status is one of the important factors checked by the lender to decide whether you can take a loan or not.
  • If your employment status shows that you are financially stable and have no debt, then the lender thinks that you can repay the loan amount on time and approve your loan request.
  • A positive employment status will result in imposing low interest on your loan.   
  • Default history

Default history is another important factor that affects the personal loan interest rate.

  • Like checking the credit score, if the lender finds any default in your credit history, then they charge you high interest on the personal loan amount.
  • Mostly, lenders prefer to give loans to customers who have zero defaults in their credit history.
  • Debt to income ratio 

If you are an employer in a well-known company and earn a high salary, you must pay a certain amount of your salary in debt repayments. In this case, your debts will affect the personal loan interest rate.

  • The debt-to-income ratio is calculated by dividing all your debt payments by your gross monthly income. A higher debt-to-income ratio indicates a more debt burden on the borrower.
  • The lender will charge a high-interest rate on a personal loan because of this factor.

Conclusion

As the borrower, you should be aware of all these things before availing the loan. If we talk about personal loan, then Interest rates is an important factor that you should consider.

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