Undoubtedly, personal loans can be stated to be bestselling services of banks and financial institutions (including NBFCs). Its intentionally called bestselling to convey how big the personal loan market is. Banks and financial institutions have introduced customized loan packages to meet demands of every strata of society. Every loan package will suit the needs of customers before applying for a personal loan. There are different types of loans- personal loans, home loans, auto loans, gold loans, etc. In return for the personal loan lent, a specific rate of interest is levied on the personal loans. This is the way a bank actually earns from personal loans. The interest rate of personal loans is based on different factors which determine the interest rate.
Credit Score
The credit score plays a pivotal role when the bank/ financial institution decides on the rate of interest of the personal loan. Your credit score is crucial set up a compatible rate of interest. If the individual has a high credit score, then the chances are for low interest rates. However, if the borrower has a low credit score, then the financial institution will undoubtedly charge more on the sanctioned personal loan. A low score is indicative of repayment defaults when the EMI stands due.
Past repayment history
Financial institutions give a serious thought to the individuals past repayment. It will also verify the number of ongoing loans and past outstanding, along with the loans taken. If the individual is making timely EMI, then the individual will be benefited with low EMIs. If the past record set by the individual is worthwhile, then lower interest rates are assured. Whereas, if the EMI has been missed in the past, then the chances for low interest rates are bleak. So, its advised to have a clean track record and avail reasonable interest rates.
Tenure of the loan
The tenure of the loan is an important criterion to judge how the interest rates must be regulated through the life of personal loans. The duration of the personal loan matters to a great extent, when calculating the interest rates. If at all, the application is confirmed with a shorter tenure, then the risk for default is much lower and thereby the interest rate. For long duration loans, banks/NBFCs charge heavy interest rates.
Collateral
Security collaterals are used to keep the lender safe. When lenders keep an asset as security, it is quite difficult to default on EMIs, when you have pledged your valuable asset. If at all the borrower defaults, it is asset is sold out in the market. And automatically lenders keep this a condition to offer personal loan at comfortable interest rates, without a collateral.
Income
Individual income is one of the most important factor for a lending institution. It is ofcourse with the individual’s source of income that determines the repaying capacity. When the income is high, the rate of interest remains and vice versa.
Competitive Pricing
Banks are always looking forward to settle up their interest rates, in tandem with the market changes. The competition strongly directs the rate of interest. So, if a bundle of banks is fixing a particular level for pricing, then the others shall follow suit.