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Personal Loan Interest Rates: Top 5 Factors on How They are Affected

Clix July 30, 2021


Personal loans are collateral-free loans that are easy to apply and quick to avail. These are multi-purpose loans that you can use to deal with varied personal reasons, like weddings, higher education, vacation, medical emergency, debt consolidation, and home renovation. Whether you have already applied for a personal loan or are planning to get one, the first and foremost thing that most borrowers look into is the interest rate.

When you start comparing the interest rates of different lenders, you will find different criteria based on which lenders determine interest rates for their personal loans. Following are the top factors that affect your personal loan interest rates.

1.    Your Income

Since a personal loan is unsecured, lenders depend on your income to ensure a timely repayment. Therefore, how much you earn is one of the most critical factors ing your personal loan interest rates. Lenders take it evident that a borrower with a higher income is more likely to repay the loan entirely on time than an individual with a lower income.

On the contrary, they charge a higher interest rate from low-income borrowers to safeguard themselves against the risk of default they foresee. That is why Clix Capital requires you to be earning minimum ₹25,000 per month to be eligible for a personal loan. If your income is high, the lender feels more confident in your repayment capacity and agrees to sanction the lowest interest rate personal loan for you.

2.    Your Credit Score

A credit score is another crucial factor that plays a significant role in getting your loan approved and determining your applicable interest rate. Your credit score reflects your credit history and repayment habits, thereby your financial management as a whole. How you manage your other loans and whether you pay your current bills and loan EMIs on time or not primarily affect your lender’s decision.

You can improve your credit score by taking a personal loan and paying its EMIs on time. Each repayment on time increases your credit score, while each delayed or missed payment will affect it negatively. A credit score of 725 or above conveys a higher trust level in your repayment capacity, allowing you to take the lowest interest rate personal loan.

3.    Your Job and Employment Status

Another factor that plays a vital role in determining your personal loan interest rates is your company status. Since it is an unsecured loan, lenders use different parameters to build trust in your creditworthiness and lend you a loan. One of them is knowing the status of your job and employment. The kind of company you work in is quite crucial for availing a personal loan.

For instance, if you are working in a government job, lenders know that you have a stable job with growth prospects. So, they may agree to offer you a loan with lower interest rates. However, if you are working with a start-up, be ready to pay higher interest rates on your personal loan. Some lenders, including Clix Capital, also require the borrowers to have work experience of at least 12 months in the same industry to get another job quickly if they lose their current position.

4.    Your Debt-to-Income Ratio

Even if you are earning a good salary and employed in a reliable company, you might be spending a large part of your income on other debt payments. In such a situation, your previous loans will affect your personal loan interest rates for any personal loans you apply for in the future.

You may calculate your debt-to-income ratio by dividing your current EMIs by your income. The higher the DTI ratio you have, the more obligated you are towards your other loans. As a result, the lender may charge you a higher interest rate on your personal loan to stay on the safer side.

5.    Your Relationship with the Current Lender

When you interact with a particular lender for a long time, you develop a sense of trust with each other. Lenders are usually more lenient towards their trusted customers and charge lower interest rates on other loans sanctioned.

However, this kind of trust is not easy to build overnight. You have to maintain your loyalty by paying your EMIs on time and showing responsible behaviour towards your credit. If you have already defaulted on a lender’s payments, they will not approve any more loans for you. So, stay consistent with your current lender to get the lowest interest rate personal loan when you need one.

Now that you know what factors affect your personal loan interest rates, the next step is to compare lenders and choose the one that offers the lowest interest rate personal loan per your eligibility. Clix Capital is one such lender that offers personal loans of up to ₹ 25 lakhs for 12 to 48 months of repayment tenure. Take advantage of our competitive interest rates and flexible repayment tenure to find a deal that fits your monthly budget.

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