What Is a Personal Loan Interest Rate?

A personal loan interest rate is the typically expressed as a percentage of the principal – the amount you borrow. It determines how much extra you'll repay in addition to the principal loan amount over the loan tenure.

The interest rate can be either fixed or floating, depending on the lender’s policy. Fixed rates remain constant throughout the loan period, while variable rates fluctuate with market conditions. Personal loans typically come with fixed interest rates. However, it is important to clarify with your vendor regarding the type of interest rate they offer.

A lower interest rate can lead to smaller monthly payments and a lower overall cost of the loan. This makes it easier to manage your finances, freeing up more of your income for other expenses or savings.

*Please note that while the interest paid on the loan, based on the lender’s interest rate, makes up a significant portion of the total loan cost, it is not the only factor. Other costs, such as processing fees pre-payment charges, etc. may also apply, depending on the lender’s policies.

Factors That Influence Personal Loan Interest Rates

Several factors influence the interest rate on a personal loan. Here are some of the most important ones:

1. Credit Score

A higher score (typically 750 and above) indicates you're reliable with repayments, which can lead to lower interest rates. A lower score may mean higher rates, as the lender sees you as a bigger risk.

2. Income and Debt-to-Income Ratio

Lenders consider your income and how much of it goes towards existing debt payments. A higher income and lower debt    are favourable for securing loans at lower interest rates.

3. Loan Amount

Larger loan amounts may come with slightly higher interest rates due to the increased risk for the lender.

4. Relationship With Lender

Reputed lending institutions may sometimes offer preferential personal loan interest rates for existing customers with a strong repayment history.

Tips to Get a Personal Loan at Lower Interest Rates

1. Check Your Credit Score and Improve It If Necessary

Before applying for a personal loan, it’s crucial to review your credit report and score. You can obtain your credit report from any of the four major credit bureaus in India: TransUnion CIBIL, Experian, Equifax, and CRIF High Mark. Many financial institutions also offer credit score check services through their websites or mobile apps.

Carefully analyse your report for any errors or inconsistencies that may be affecting your score. If found, dispute them with the relevant bureau to have them corrected.

If your low credit score is not due to an error, take steps to improve it. Prioritise timely payments on your EMIs, credit card bills, and utility dues. Keep in mind that a high credit utilisation ratio (the amount of credit used versus the available limit) can negatively impact your score.

Additionally, avoid applying for too many loans or credit cards within a short period, as multiple hard inquiries can temporarily lower your score.

2. Compare Different Lenders and Loan Options

Compare offers from different financial institutions and online lenders to find the best interest rates available. When doing so, be sure to consider the Annual Percentage Rate (APR). The APR includes both the interest rate and any fees or charges associated with the loan, such as processing fees, giving you a more complete picture of the total cost. Reputed lenders also provide a free APR calculator on their websites so that users can get a better estimate of the overall cost of their loan.

3. Consider a Shorter Loan Term

A longer loan term might offer a lower monthly payment, but you could end up paying more in interest over time. On the other hand, a shorter loan term may have higher monthly payments but save you on interest costs. A shorter repayment period may also come with a lower interest rate, depending on the lender’s policies.

4. Negotiate for a Lower Rate

Try negotiating with the lender for a lower personal loan interest rate, especially if you have a strong credit history and an existing relationship with the lender.

5. Keep an Eye on Special Offers

Lenders may have promotional offers, especially during festive seasons, where lower interest rates might be available for eligible applicants.

6. Consider Applying With a Co-Applicant

This can enhance your chances of approval and may lead to a lower interest rate, especially if the co-applicant has a strong credit history and stable income.

Conclusion

To secure a personal loan with favourable interest rates, it is crucial to understand the factors that influence them and take appropriate steps. Prioritise maintaining a strong credit score, thoroughly researching different lenders, and consider adding a co-applicant with a higher credit score. You can use a personal loan EMI calculator from trusted lending institutions such as SMFG India Credit to get an estimate of your monthly EMIs.

*T&C apply. Loan eligibility, loan terms, and loan disbursement processes are subject to the lender’s policy at the time of loan application.