Personal Loans are the most popular Loans in India. They are Unsecured Loans, which means that they do not require collateral or security to be pledged against them. However, they often come with higher interest rates compared to Secured Loans.
Let us understand how Personal Loan interest rates are determined:
- Credit score
The crucial factors that influence Personal Loan interest rates in India are your credit score. A credit score refers to a numerical expression of your creditworthiness, based on your credit history. It is calculated by credit bureaus like CIBIL, Equifax, and Experian. A higher credit score indicates a lower risk of default. This simply means that lenders are more likely to offer lower interest rates if you have a good credit score.
Hence, it is wise to check on the same by running a CIBIL Score check for free online from time to time.
- Loan amount
It is another crucial factor that influences interest rates. In most cases, lenders offer lower interest rates for higher Loan amounts. This is because larger Loan amounts mean more risk for the lender, and they want to ensure that they are compensated for the increased risk. Conversely, smaller Loan amounts are less risky for lenders, so they may offer higher interest rates.
- Income and employment
Lenders prefer borrowers with stable employment and a regular source of income. This is because it indicates that the borrower is more likely to repay the loan on time. Borrowers with higher incomes may also be offered lower interest rates because they are more likely to have the financial means to repay the Loan.
- Loan tenure
The Loan tenure, or the length of time that the borrower should repay the Loan, also affects the Personal Loan interest rates. Longer loan tenures usually result in higher interest rates. This is because the lender assumes more risk by lending money for a longer period. Shorter Loan tenures are less risky for lenders. Therefore, they can offer lower interest rates.
- Market conditions
These also play a role in determining interest rates. Lenders may adjust their interest rates based on changes in the economy, such as inflation, interest rate fluctuations, and market trends. For example, during times of high inflation, lenders increase interest rates to compensate for the increased risk of lending money.
- Competition
When many lenders are competing for borrowers, interest rates may be lower. This is because lenders want to attract more borrowers by offering competitive rates. On the other hand, when there are fewer lenders in the market, interest rates may be higher.