8 Ways to Get the Best Personal Loan Interest Rate in India

What Are the Factors Influencing Personal Loan Interest Rates?

Securing the best loan deal requires a comprehensive understanding of the various factors influencing interest rates. These factors play a pivotal role in determining the interest rate and other terms of your personal loan.

1. Credit Score:

One of the most influential aspects that determine your personal loan interest rate is your credit score, which essentially showcases your creditworthiness. A higher credit score can be a bargaining tool to negotiate a lower interest rate, as lenders often consider individuals with excellent credit scores as low-risk borrowers.

2. Income and Employment Stability:

Income level and employment stability are equally important factors that influence the personal loan interest rate. A steady employment history and a substantial income lead to lower interest rates.

3. Loan Amount:

The loan amount you seek significantly impacts the personal loan interest rate; higher loan amounts come with increased risk for lenders, usually resulting in higher interest rates. Hence, it is advisable to calculate the exact loan amount you need and comfortably repay using a Personal Loan EMI Calculator.

4. Loan Tenure:

Loan tenure, also known as loan term, over which you will repay the loan, also matters in determining the interest rate of your personal loan. Longer tenures can translate to higher interest rates due to the perceived higher risk.

5. Employment Type:

Self-employed individuals might encounter higher interest rates compared to salaried individuals due to the perceived risk associated with different employment types.

6. Lender's Policy:

A lender's lending policy and the terms and conditions play an important role in deciding your personal loan interest rate. Typically, banks offer personal loans at comparatively lower interest rates than NBFCs but also offer lower loan amounts.

How Does the Personal Loan Interest Rate Shopping Impact Your Credit Score?

Applying for various personal loans from different lenders can potentially affect your credit score, as it involves multiple credit checks.

There are two primary types of credit checks:

1. Hard Credit Check:

When a lender requests your credit score, it creates a trace on your credit history. Multiple hard checks in a short period can result in a slight reduction in your credit score. A hard credit score check is usually done to assess your loan and credit card application. Furthermore, future lenders you approach may take note of this.

2. Soft Credit Check:

Lenders may review your credit report without any adverse impact on your credit score. In other words, your credit score remains unharmed when a soft credit check is conducted. This check is often performed for Buy Now Pay Later loans and the initial assessment of loan applications. Some lenders perform soft credit checks to assess your small-value loan application.

What Are the Different Ways to Get a Best Personal Loan Interest Rate in India?

1. Avoid Borrowing from the First Lender That Offers You the Loan:

We often receive random calls from banks and NBFCs offering personal loans. Such calls can be alluring when we are in a cash crunch. However, you should resist the temptation to accept the first loan offer you receive. Different lenders offer varying interest rates, terms, and conditions. By exploring multiple options, you can potentially find a loan that better suits your financial needs and offers a more favourable interest rate.

2. Shop Around for the Best Interest Rates:

Lower interest rates mean lower overall borrowing costs, making it a smart financial move to find the best personal loan interest rate available to you. Doing a quick online search can help you find a lender providing the lowest interest rates and processing fees. Alternatively, you can conveniently evaluate various lenders using a financial website that offers personal loan comparisons. Many financial websites allow you to compare several lenders at a time.

Nevertheless, it is advisable to verify the most recent fees and expenses on the official website of the lender, as certain financial websites may not be updated. Conducting comprehensive research will guarantee that you do not miss out on a better offer.

3. Apply Considering Your Eligibility:

Before applying for a loan, assess your personal loan eligibility. This includes reviewing your credit score, debt-to-income ratio, income, employment stability, and other factors that lenders consider when approving loans. Applying for loans you are eligible for increases your chances of approval and ensures you do not face unnecessary rejections, which can negatively affect your credit score.

4. Improve Your Credit Score:

The approval or rejection of your personal loan application primarily depends on your ability to repay the loan, considering it is an unsecured loan. Your repayment capacity is primarily assessed through your credit score. It is crucial to make timely payments on your EMIs and credit card bills since credit bureaus track these monthly repayments. This is the easiest yet highly effective method to improve your credit score.

Conversely, if you miss an EMI payment, it will be recorded in your credit history, negatively impacting your credit score. Lenders view individuals with good to excellent credit scores, typically ranging from 700 to 900, as low-risk borrowers. Hence, they are more willing to offer loans to these individuals because the likelihood of loan default or delayed repayments is lower. This results in lenders providing loans to those with good credit scores at favourable interest rates.

However, having a less-than-ideal credit score does not necessarily mean you won't qualify for a personal loan, but it might lead to higher interest rates, longer approval times, and less favourable loan terms. Click here to read our trending article on 8 guaranteed ways to improve your credit score.

5. Consider Pledging Your Asset:

Some lenders may offer secured personal loans, where you pledge an asset as collateral. This can result in lower interest rates, as the lender has a form of security. However, it is important to carefully consider the risk involved, as you could potentially lose the pledged asset if you cannot repay the loan.

6. Choose a Shorter Loan Tenure:

A shorter loan tenure typically leads to higher monthly repayments, but it also reduces the total interest you will pay over the life of the loan. If you can manage the higher monthly repayments, opting for a shorter tenure can save you money in the long run.

The quicker the lender receives their funds back, the less risk they associate with their lending. This is the main reason why lenders offer the lowest possible interest rates for personal loans with shorter durations. In general, personal loans already have relatively short terms, but further shortening the duration can secure you the best loan rate.

Getting a low interest rate is of significant importance. Even a slight difference in your interest rate can result in substantial savings. However, it is important to note that opting for a shorter loan tenure should not be done impulsively.

7. Apply with a Co-borrower:

Applying for a personal loan with a co-borrower, especially one with a strong credit history and stable income, can improve your chances of approval and secure a lower interest rate. Lenders consider the combined creditworthiness of both applicants.

8. Negotiate with the Lender:

Do not hesitate to negotiate with the lender. While personal loan interest rates are often fixed, you may be able to negotiate other terms, such as loan tenure, processing fees, or prepayment penalties. A polite but firm negotiation can lead to more favourable loan terms.

To conclude:

In order to get the best personal loan interest rate, a well-researched strategy is a must. Factors like maintaining a good credit score, applying for the right loan amount and tenure, and making informed choices about loan terms can definitely help you secure a favourable loan arrangement.

However, beyond just the rate of interest, you should also factor in other repayment terms and fees when making your loan decisions. Moreover, responsible borrowing and timely repayments enhance the chances of securing the best interest rates and pave the way for achieving your financial goals.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

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This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.