How is Interest Calculated on a Personal Loan?

New personal loan accounts increased by 133.9% YoY in Q3, 2019 according to a survey. One of the reasons for the growth of such loans is that they allow borrowers to avail funds without mortgaging any of their assets or properties. This simple procedure has led to the constant growth of personal loans, even when all other non-food credit sectors are on a decline.

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Individuals looking for a personal loan must first consider a few factors of such loans before applying. Assessing interest calculated on a personal loan is one of the most critical parts of this process. As a borrower, one should know the factors that can make a difference to his/her personal loan rates. Interest rates influence your ability to repay the loan. These steps are important to consider to avoid defaulting, and being contacted by debt collectors like One Call Now 877-698-3261 or Asset Recovery Solutions 888-678-0087.

Factors affecting personal loan interest rates

The following factors can determine whether a borrower is eligible for the lowest rates on his/her personal loans.

1. CIBIL score of the applicant

Repayment history is a vital determinant of interest calculated on a personal loan by interest rate calculator. Lenders often inspect an applicant’s previous repayment record to form an idea regarding repayment capability and habit.

The CIBIL score is a great indicator of an individual’s creditworthiness. Those with scores beyond 750 points in this scale tend to receive favourable interest rates on their unsecured credits.

A report suggests that out of the 220 million Indians eligible for loans, only around 70 million of them are credit-active.

A borrower suffering from low credit ratings, therefore, should improve his/her score before applying for a personal loan. For instance, repaying outstanding debt within the stipulated time is one of the things to do to improve personal credit score.

2. Income and employer’s reputation

Interest rate calculated on a personal loan also largely depends on the applicant’s income. Most lenders perceive income as a directly proportional factor to repayment ability. Thus, one who earns more is more likely to repay the borrowed sum within its tenor.

Hence, to minimise the risk of default from low-income borrowers, a lender may charge an increased interest rate on their personal loans.

Apart from a borrower’s earnings, lending institutions also check the reputation of his/her employing organisation. Employees working in MNCs, government establishments and other reputed firms are preferred when it comes to personal loans. These applicants may be able to avail such unsecured credit at lower rates.

3. Debt to income ratio

Interest calculated on a personal loan tends to depend on an applicant’s existing debts as well. An individual already repaying a significant debt is deemed a high-risk borrower when compared to another who has no outstanding dues.

If a borrower’s debt to income ratio is too high, most lenders may reject his/her loan application. Alternatively, the NBFC may increase the interest rate to reduce risk when lending to such an applicant. A simple way to avoid such rate hikes is to repay all existing debt before applying for a fresh loan.

4. Loan amount

The amount of money that one applies for also plays a role in determining interest.
The increased principal leads to lower interest rates and vice versa.

Nevertheless, before deciding this amount, one should determine how much personal loan he/she can get based on the income and other factors.

An interest rate calculator can also help in this decision by highlighting the exact EMI that one would need to bear against a certain loan amount.

Competitiveness amongst different borrowers

Reputed financial institutions often compete with each other when it comes to the interest rates on personal loan, based on the facilities available to consumers.

For instance, lenders like Bajaj Finserv provide a flexible repayment tenor ranging up to 60 months. Eligible candidates can opt for loans of up to Rs.25 lakh.

The company simplifies and accelerates this loan application procedure with the help of pre-approved offers. These offers are available on business loans, personal loans and other financial products. Borrowers can check their pre-approved offers by simply submitting their phone number and name.

Thus, a potential borrower must compare all available loans in the market to determine the lowest rates. Apart from picking the right lender, one should also find the right personal loan tenor, which effectively eases financial burden during repayment.

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