We often require immediate, personal loans to meet emergency needs, such as a medical emergency, wedding, higher education, project renovation, or even a vacation. Personal loans can be taken for any purpose. Since they are unsecured and are instant loans, personal loans are widely sought after. And we would go with that lender or financial institution that offers us the lowest interest rate.
However, the affordability of a personal loan depends on its interest rate as a higher interest rate means a higher EMI, which decreases affordability.
A few factors that affect the interest rates when applying for an instant personal loan are:
1. Credit history:
Before applying for any loan, you need to ensure that you have a good credit score since before approving any loan, the lender usually evaluates your credit history. An interest rate is set depending on how good or bad your credit score is. The better your credit score, the lower the interest rate.
If you have a regular, steady flow of income, then there are higher chances of you being assigned a personal loan with a lower interest rate as lenders determine how easily you can repay the amount borrowed. So, if you have a higher income, the bank will view you as less risk and assign a loan with a lower interest rate.
3. Loan payment history:
Not just your credit score, your previous repayment records will also be checked before deciding your loan interest rate. If the bank or lending institution sees that you have been regular in repaying your previous dues and have settled them on time and if you do not have any defaults, then there are higher chances of them charging a lower interest rate on your loan.
4. Debt to Income Ratio:
The debt to income ratio is a ratio of all your debt payments divided by your total income. A higher debt-to-income ratio conveys a higher debt burden, the bank or lending institution may charge a higher rate on your loan. Therefore, your goal must be to lower your debt-to-income ratio as much as possible.
5. Relationship with the bank or lender:
If you have a long-standing relationship with your bank or lender, the chances of them charging a lower rate of interest for your loan are high since lenders tend to be more lenient in charging rates of interest when lending to a customer they trust.
The points mentioned above are just a few critical factors affecting interest rates when applying for a personal loan. There are various other factors as well, such as the history of defaults, the status of your employer. And even though a personal loan may seem alluring at the moment as you are in immediate need of funds, you need to ensure that you consider all such factors that affect the rate of interest and your capability to repay the loan.
Taking all these factors into consideration will ensure that you stay informed of your interest rates when applying for an instant personal loan. Each factor focuses on a slightly different part of the lending process,and keeping them all in mind will help you take an instant loan that best suits your requirements.