5 Factors That Have the Biggest Impact on Personal Loan Interest Rates

Posted by Atish Nayar on March 22nd, 2019

How is it that two borrowers taking a personal loan of the same amount for the same tenure and from the same lender are offered the loan at different interest rates?

This is because while the MCLR (Marginal Cost of Funds Based Lending Rate) is fixed by the RBI and is the same for every lender throughout the country, the banks generally offer loans at a rate slightly higher than this base lending rate of the RBI. This is the reason why different lenders in India offer the same loans at different interest rates.

However, what about the difference in the interest rate of a personal loan taken by two individuals from the same lender? This difference depends on many crucial factors and borrowers can use them smartly to get a better deal on their personal loans. So, what are these factors? Five of the most important ones are as follows-

1. CIBIL Score: CIBIL is a credit bureau, which keeps track of the credit history of the individuals. Based on the credit history, it calculates a 3-digit CIBIL score. This score works as a window for the lenders through which they can see how responsible you have been with credit in the past.

The score ranges from 300 to 900. As personal loans are unsecured loans, most lenders require the borrowers to have a minimum CIBIL score of 750 or above. If you have an impressive CIBIL score, you can talk to the loan officer to try and get a better deal.

2. Monthly Income: Would you mind giving a loan of Rs. 10,000 to one of your friends whose monthly income is Rs.1 lakh? Most probably you won't. Same is the case with lenders too. While the lenders do not consider borrowers as friends, they do prefer giving personal loans or any loan for that matter to people who have a decent monthly income.

3. The reputation of Your Employer: If you are a salaried professional, the credibility of your employer is also important for the lender. This is because people working at reputed companies are generally considered to have a stable career. This also means that such people are more likely to repay the loan on time.

Moreover, if you have been working at one such company for a long time, it can be the icing on the cake. You can use this to your advantage while discussing your loan with the lender.

4. Your Age: The next important consideration for the lender is your age. Young borrowers are generally considered safer than borrowers who are close to their retirement age when it comes to personal loans.

As young borrowers have several years of their professional lives left, they can work and repay the loan on time. However, things get a little risky for the lender while lending to someone who is close to retirement. So, if you are a fairly young salaried or self-employed professional, you can try to bargain and get a cheaper loan.

5. Relationship with the Lender: If you already have taken a loan from the same lender in the past and repaid it on time, this too can benefit you. Lenders love when they get repeat customers, and if their previous experience of granting a loan to you has been hassle-free, they'd generally not mind extending some extra favours. This is another important factor that gives borrowers the power to negotiate personal loan interest rates.

While there is no denying that the interest rate is the biggest cost while borrowing a personal loan, it is not always possible for the lender to reduce the interest rate. In a lot of such cases, the lender might offer other benefits such as lower processing charges. In the end, it is all about saving as much money in whatever way possible. So, keep the points mentioned above in mind when taking a personal loan to get a better deal and experience huge savings.