Secure Your Interest Rate on a Personal Loan

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Personal Loan Interest Rate

The Reserve Bank of India decided to keep the repo and reverse repo rates unchanged at 4% and 3.35%, respectively, in its Monetary Policy Meet in December 2020. Moreover, owing to the immense economic strain faced by Indians in 2020, the apex bank had slashed the repo rate by a total of 115 bps since January of that year.

These changes in the external benchmarking rate have also led to a similar drop in interest rates for most consumer credits. Personal loan interest rates, for instance, are now more affordable than ever. Such favourable terms have opened new potential for this particular segment. 

  • According to a November 2020 survey, 71% of respondents were eager to avail of a personal loan in next 3-6 months.
  • Financing business ventures, buying household and electronic durables, two or four-wheelers, etc. were the primary motives to avail of such a credit.

Regardless of the reasons and current repo rate, borrowers can minimise the overall interest cost of such personal loans. Improving their eligibility is one of the simplest ways to achieve this. Discussed below are some other workable tips that borrowers can implement.

  • Maintain a CIBIL score between 750 and 900

CIBIL score is one of the first things that a lender checks when it comes to processing unsecured credit applications. It also has an immense bearing on the personal loan interest rates that NBFCs quote in the credit contract. While 750 is the minimum eligible score to avail of such loans from renowned lending institutions, a score of 800 or more can help one negotiate more favourable terms. 

Following are some possible ways to keep one’s credit scores in this ideal range – 

  1. Maintaining a balanced credit mix by opting for both secured and unsecured loans.
  2. Keeping credit utilisation ratio under 40%.
  3. Repaying existing debts, whether loan EMIs or credit card bills, as per schedule without any history of delinquency.

While it is possible to get a personal loan with poor credit score, doing so can lead to increased interest charges and other restrictions.

  • Actively search for the best interest rates

Several financial institutions provide personal loans to eligible candidates at suitable terms. Nevertheless, each of them charges distinct interest rates, which can vary significantly from another lender in the market. The internet is the best place to compare various rates for personal loans. After finding an affordable option, individuals can proceed with an official application. 

In such matters, a personal loan EMI calculator can help significantly. Besides computing the monthly instalments, such a tool also reveals how even small changes in the interest rate can affect total repayment liabilities. Thus, understanding how to use a personal loan calculator can work in favour of the eligible borrower.

  • Avail loans at reducing interest rates

Personal loan interest rates are broadly of two categories, namely, flat and reducing. While the former is more common, it often leads to increased interest liabilities when compared to a reducing rate loan. In a flat-rate system, the interest is charged on the total principal amount.

For instance, an individual opting for Rs.5 lakh as a personal loan at flat rates of 11% for 5 years would need to service interest of around Rs.2.75 lakh by the tenor’s end. A loan with similar terms and conditions but with reducing interest rate would need borrowers to service a total interest of around Rs.1.52 lakh only, which is a significant reduction.

  • Negotiate favourable terms using income and employment status

Individuals working at a high-paying job or with reputed government firms or MNCs can acquire unsecured personal loans at favourable rates, provided they meet all eligibility criteria. Such borrowers would need to negotiate with their chosen lending institution, leveraging their employment status to avail of favourable repayment terms. 

When opting for such a loan, one should keep in mind that loyalty towards a particular lender is often necessary to get the best deals. Existing customers, who enjoy a good repayment history and track record with a particular NBFC, are more likely to get the best personal loan interest rate quotes.

Reputed lenders, such as Bajaj Finserv, also ease and accelerate the loan application process with pre-approved offers to its existing customers. These offers are available on a host of financial products, like small personal loan, business loans, credit cards and more. You can check your pre-approved offer by submitting a few details, including your full name and phone number.

Further, individuals must provide all the important documents required for a small personal loan application. It ensures smoother loan approval and disbursal of the amount, thereby making it convenient for the individual.

Secure interest rates on personal loans

Individuals can borrow a personal loan against two types of interest rates, namely –

  • Fixed rate of interest

As the name suggests, the interest rates under this regime remain fixed throughout the loan tenor, meaning the borrower has to bear a fixed monthly liability till the loan term ends. 

For instance, if Mr Agarwal borrows Rs.5 lakh against a fixed interest rate of 14% for 3 years, he will need to service a fixed EMI of Rs.17,089 for the entire tenor.

Opting for a fixed current personal loan interest rate allows individuals to plan their repayments throughout the entire tenor at the very outset.

  • Floating rate of interest

Floating interest rates are determined per any external benchmark with which they are linked, alongside other market conditions. They are, thus, subject to change during a loan tenor and may allow borrowers to service lower or higher EMIs. 

  • The RBI slashed its repo-rate to 4% on May 22nd, 2020, consequently bringing down the interest rates against personal loans.

Fixed interest rates are generally higher than floating rates, and a borrower has to relinquish the advantage of servicing lower EMIs by opting for this particular regime.   

Currently, individuals can easily avail of a low interest personal loan, and on opting for a floating interest rate, they can even enjoy a further reduction in the rates, should the market conditions change in due course of their tenor.

When it comes to the application of loans in India, two types of financial products are mostly applied by borrowers. They are personal loans and home loans. 

Personal loans are available to cover different needs as it comes without usage restrictions. 

On the other hand, a home loan is taken to get enough finance to buy or build a new home. But, the funds out of the home loan can only be used for buying or constructing a home. 

Talking about the rate of interest on a personal loan and a home loan, the latter comes with a reduced one. It is because a home loan is secured by collateral and comes with a longer tenor than a personal loan. 

Since lenders have collaterals, they provide housing finance at a lower rate. On the other hand, a personal loan is unsecured. It means that it is given on the basis of the borrower’s creditworthiness. 

It is one of the costliest types of debts, along with credit cards. Lenders charge a higher rate of interest since there are no collaterals. Hence, lenders always have the risk of defaults on repayments. 

But, anyone having a robust CIBIL score of 750 or more can get a low interest rate on personal loans. 

By making timely repayments towards their loans and credit cards, one can increase his/her credit score. Also, comparing all offers on a third-party website to pick the best deal can help them go for a low interest rate on personal loans. 

Other factors that can help anyone avail of a low interest rate on personal loans have a clear repayment and employment history. 

Based on one’s creditworthiness, leading lenders in India offer a large amount to applicants to meet diverse needs. From weddings to debt consolidation to weddings to medical emergencies and more, personal loans could be used for all.   

Must Read: Are You Paying High Interest on a Home Loan? Here are Tips to Reduce Your EMIs

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