Here's How to Qualify for Personal Loans with Lower Interest Rates

A Personal Loan is an unsecured loan that does not require the borrower to provide any security or collateral. Since it is offered without collateral, the borrower’s repayment capacity is a major factor considered while approving the loan application and deciding the interest rate. The Personal Loan interest rate typically starts at 11% p.a. and can go up to as much as 28% p.a., which is very high compared to other types of secured loans, such as Home Loan, Car Loan, Loan Against Property, Gold Loan, etc.

Since there is no restriction on the end-use of the Personal Loan amount, the money can be used for any purpose like medical emergency, home renovation, vacation, clearing off other loans, paying a child’s school fees, purchasing a smartphone, jewellery, or home appliances, etc. However, the high rate of interest charged on the Personal Loan makes it a costly loan. We advise availing of a Personal Loan only in case of a medical or financial emergency when you do not have any assets to pledge, and getting a personal loan is the only option left. A Personal Loan can be a boon in challenging times or a curse when it is a hasty decision! However, we all come across certain situations when the only option we could see is opting for a Personal Loan. To avoid paying high interest and get eligible for a lower interest rate Personal Loan, it is crucial to follow these practices:

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1. Maintain a good credit score:

As a Personal Loan is an unsecured loan, your repayment capacity plays a major role in approving or rejecting your loan application. Your repayment capacity is primarily calculated based on your credit score. Since credit bureaus keep track of your monthly repayments of EMIs and credit card bills, it is necessary to pay your dues on time to maintain and improve your credit score. This is the simplest yet most beneficial thing you can do to improve your credit score. However, each time you miss to pay your EMI, it gets recorded in your credit history, which negatively impacts your credit score. Lenders consider your profile to be low-risk if you have a good to excellent credit score, i.e., 700 to 900. That said, the lenders will be willing to offer loans to low-risk customers as the chances of loan default, and delayed repayments will be less. This makes the lenders offer loans at an attractive interest rate to individuals with good credit scores. However, not having a good credit score does not mean you will not be eligible for a Personal Loan, but you might get a loan for a high-interest rate, the loan might not be approved quickly, and the loan terms might not be favourable. Click here to know the 8 guaranteed ways to improve your credit score.

2. Keep a good bank balance:

While checking your repayment capacity, lenders check if you are maintaining a good Average Monthly Balance. Banks calculate your Average Monthly Balance by adding the daily closing balance of all days in a month and dividing it by the number of days in a month. Therefore, if you maintain an overall good balance, banks/NBFCs consider lending you because it shows you have a good repayment capacity. Moreover, if you maintain a higher average balance in your savings account, banks offer instant personal loans, pre-approved personal loans and pre-qualified personal loans that are completely seamless, hassle-free and have a comparatively lower interest rate. Such personal loans are ready for disbursements, which can be credited into your savings account with just a few clicks. However, we advise you instead of getting fascinated by an instant loan and blindly availing it; you should read the terms and conditions, know the various charges, compare them with other lenders, and then make an informed decision.

3. Maintain a good Debt-to-Income Ratio:

A Debt-to-Income Ratio is a ratio of your monthly EMIs and monthly income. Having EMIs less than 30% of your monthly income is considered a good debt-to-income ratio. Higher the ratio, the higher the chances of loan application rejection. A higher ratio depicts your liabilities are more than your earnings and attract high-interest rates from the lenders. For example, if your monthly salary is Rs 50,000 and your existing EMIs cost Rs 30,000, your debt-to-income ratio is 60%. Lenders usually consider it risky if a ratio is more than 45% and may offer a very high-interest rate if they approve the loan. As you do not have to provide any security in a personal loan, you should only consider your income sources and apply only for an easily manageable amount that you will be able to repay. While assessing your credit repayment capacity, you should consider all the fixed and variable expenses, the possibility of any increased expenses, and your current dues.

4. Employment Consistency:

Lenders consider your profile low-risk if you have a steady full-time job. Whereas individuals with frequent job changes and no professional achievements, freelancers, contractual workers, and part-time workers are considered riskier profiles and could be offered higher interest rates compared to the former category. Having a steady monthly income provides repayment assurance to the lender. Hence, while assessing your repayment capacity, lenders consider the number of years you have been working in your current company for deciding the personal loan interest rate.

To Conclude:

Financial discipline is the key to getting qualified for Personal Loans with lower interest rates. While following all the tips explained above is crucial to get the best loan deals, it is advisable to compare different lenders and choose the one that offers you the best deal before applying for a loan. Besides, if the lender is not offering you the expected interest rate despite having a good credit score, you can try to negotiate with them or look for other lenders. Since Personal Loan interest rates are already high, even a small difference in the interest rate can make a considerable difference in the total cost of the loan.

Warm Regards,
Ketki Jadhav
Content Writer