How Does a Lender Decide Personal Loan Interest Rates in India?

As we all know, a personal loan is one of the most popular loan options among the individuals that are looking to get urgent funds. The special thing about a personal loan is that you can get it without pledging any security to the lender. A personal loan is considered to be an unsecured loan that’s why lenders check an applicant’s eligibility criteria quite closely before giving the loan amount. Having an unsecured nature, you should think through before opting for the Personal Loan Interest Rates as it can decide the repayment amount. 

When you are taking a personal loan, lenders expect you to repay the loan amount within a fixed tenure via EMI. This EMI amount consists of a portion of both principal and interest amount. You can calculate the EMI amount with the help of a Personal Loan EMI Calculator. But there are a few factors that can help lenders in deciding the final rate of interest for an applicant. In this article, we will shed light on all those factors that determine the personal loan interest rates in India. So, keep reading!

Factors deciding Personal Loan Interest Rates in India

As we told there are a few factors that lenders check before finalizing the rate of interest for you. These factors are your Credit Score, Gross Monthly Income, Loan Amount, Employment Type, Existing Obligations, etc. You can look at all of them below. 

Credit Score:- Credit Score determines the repayment behavior and creditworthiness of an individual. Since a personal loan is an unsecured loan, lenders are more likely to provide the loan amount to an individual who has a good score (700 or above) to reduce their credit risk. Also, such individuals can get lower personal loan interest rates as compared to people who have low credit scores. For example, SBI Personal Loan Interest Rates tend to be much lower for individuals with scores above 700. 

Gross Monthly Income:- A higher monthly income simply indicates a higher repayment capacity and when you have a higher repayment capacity, lenders are more likely to provide you lower personal loan interest rates. When you have a higher monthly income, the chances of you paying the loan amount timely are pretty high. One of the other advantages you can get is the high loan amount from the lender. You also need to remember that lenders also have minimum monthly income criteria that you need to meet. This changes from one lender to another based on one city to another city. 

Existing Monthly Obligations:- Loan and Credit Card EMIs that you need to pay every month is known as the current obligations. If you have higher existing monthly obligations, it can impact your personal loan interest rates negatively as it hampers your repayment capacity. Every lender will check the Fixed Income to Obligation Ratio (FOIR) before sanctioning you the loan. Generally, a FOIR of 50% or less is considered to be an ideal to get low personal loan interest rates. 

Employment History:- An individual who has a long employment history with an organization automatically qualifies to get lower personal loan interest rates. These factors generate trust in the lender that the applicant would repay his or her loan on time. Each lender has also a fixed criteria when it comes to the employment history like to get HDFC Personal Loan, an applicant must have a work experience of 2 years.