A personal loan can come to your financial aid at a time when you are facing a severe financial crunch and need a good amount of money to bail you out of it fast. It seems like an easy and convenient financial product, but it can be tricky too, if you do not know all the nuances of a personal loan. Before you go scouting for easy personal loans, it will serve you well to know what impacts personal loan interest rates and why the same bank may give out personal loans to different people at different rates of interest.
Unsecured and Expensive Loan Product
The first thing you need to know before you even compare personal loans, is that they are expensive loan products. This is primarily because they are an unsecured line of credit. This essentially means that the bank does not have a collateral to ask of you in lieu of the loan it is giving out to you. In case of secured products such as a home loan a car loan or even loan against FDs and gold loans, there is an underlying product or a security that the bank knows it can take ownership of, in case you turn out to be a defaulter. In the case of a personal loan, there is no such security and therefore the bank must rely only its credit assessment to judge what you are capable of repaying the amount you wish to borrow. Here are some factors that determine the rate of interest on personal loans.
Your income and employer are deciding factors
Banks only have your salary slip or your income statement to rely upon when they are judging your credit worthiness. Thus, the higher your salary, and the more your income the lesser will be your personal loan interest rate. In the same way, your employer organisation and its reputation will also matter. Since banks are lenders to most companies pan India, they maintain a list of “A” list companies.
If you happen to work with one their A lister’s with a salary of Rs 50,000 and above it is likely that you will get a loan at a rate of 13-14% per annum. If you are making Rs 75,000 and above you may even manage to get a personal loan at an interest rate of 12.5%. However, if you are working at a relatively new firm, with a high salary, the bank may be wary of lending to you and you may be required to pay an interest rate of 15-16%. Some conservative banks may even ask for a recommendation letter from your organisation or ask you to bring in a guarantor for your loan. Personal loan interest rates are therefore determined by the bank and its assessment standards.
Your credit score matters
The Reserve Bank of India, the central banking authority of India, has made it mandatory for all banks to look at the credit score of an individual as a part of your credit assessment process. While this holds true for all types of loans, a lender is likely to pay closer attention to details in your CIBIL report while giving you a personal loan. As we described earlier, the credit assessment needs to be scrutinized thoroughly, since a personal loan is an unsecured line of credit.
Thus if you have a CIBIL score of 750 and above, it is likely that you will make the cut quite easily. A good CIBIL score, above the level of 750 is a reiteration of the fact that you will be a responsible borrower and will be able to make the repayments on time. This will give the lender the assurance it needs to give you the personal loan that you have applied for.
While personal loans may come across as a great relief when you are in a cash crunch or are trying to consolidate debt, or are faced with an emergency in your personal or professional life you must tread carefully. It is financially prudent to borrow only the amount of money you need immediately and are sure of repaying that amount in a short period of time.
It will serve you best to remember that a personal loan does not come cheap and will work out to be more expensive the longer you extend the repayment loan. Therefore, it is advisable to keep instant personal loans or easy personal loans at a bay unless you are in dire straits. You may want to consider gold loans or loans against FDs if you do have that option instead. However, if you must take a personal loan, make sure you opt from against the range of smaller personal loans with a short tenure make regular payments on it. This will not only help you build a good reputation with your lender it will also help you to improve your CIBIL score over the long run.