About Personal Loan Interest Rates
A personal loan is an unsecured type of loan i.e. it does not require you to keep your property or any other asset as collateral for security reasons. The majority of the banks and other financial institutions offer personal loans. You can take a personal loan for any reason, like covering the expense of a wedding, home renovation, travelling, medical emergency, or to consolidate your debt.
One of the most important factors that should be considered while taking a personal loan is its interest rate. Personal loan interest rates can range anywhere between 11% and 20% across banks and other financial institutions. Here are some factors that affect the interest rate of your personal loan.
Factors Affecting Interest Rates
Your Income - Majority of the banks have their categories according to which they divide the borrowers based on their income levels, and the interest rate on the personal loan can vary across these groups. It is because, if your income is high, the chances of you not repaying the loan are less. Banks have three income categories- Rs. 20,000 to Rs. 50,000, Rs. 50,000 to Rs. 75,000 and Rs. 75,000 and above. The higher your income, the lower will be the interest rate.
Status of Your Company - Apart from individual salary, banks also have different categories in which the companies are divided. Usually, these categories are- Top 500 Companies or Elite or Cat A, Cat B, Cat C, and Others. Just like with the income, the better the rating of your company, the lower will be the interest rate.
Bank Relations - If you already have a savings account or salary account in a bank, there is a higher possibility that the bank will offer some added advantages to you, which can be in the form of lower processing fees or interest rates. Moreover, many of the banks have special personal loan schemes exclusively designed for their customers.
Credit Score - Your CIBIL score is an integral factor in deciding the fate of your loan application. CIBIL score ranges between 0 and 900. Banks usually grant the personal loan if the CIBIL score of the borrower is above 750. And if your CIBIL score is excellent, for instance, above 800, the bank can reduce the interest rate as well.
Negotiation Skills - You can also discuss your personal loan and its interest rate with the bank employees and can work out a better deal if you have good negotiation skills.
Fixed and Floating Interest Rates
Another dilemma for the personal loan borrowers is to select between a fixed and floating interest rate. While a fixed interest rate is stagnant throughout the tenure of the loan, a floating interest rate changes as per the inflation scenario of the country and the base rate of the RBI.
Usually, the floating rates are lower than the fixed rates by 1-2 percent. However, the inflation and base rates announced by the RBI can mean that you’ll be required to pay a different amount for each EMI. While fixed interest rate allows you to plan your finances in a better way, floating interest rate could translate into lesser EMI burden to the borrower.