Personal loan: Follow these simple steps to secure a loan at low interest rate
12 December, 2024 | 11:00 IST
Personal loans have become a lifeline for managing financial challenges — whether it’s treating yourself to a getaway or covering unexpected medical expenses. But thanks to the digital age, applying for a personal loan is as simple as a few taps on your phone, making funds accessible within minutes.
Moneycontrol, for example, offers a seamless and fully digital personal loan experience. Enjoy access to a hassle-free process with minimal processing fees and quick disbursement directly to your bank account. Secure your loan in just three steps — fill in your details, complete the KYC verification and set up your EMI repayment plan.
Now that you know how easy it is to access a personal loan with Moneycontrol, it’s important to understand that the interest rate you receive can have a huge impact on your financial future.
Let’s take a closer look at the factors that lenders consider when determining the rate, so you can better position yourself to secure a loan with favourable terms.
Factors that affect your personal loan interest rate
Income level: Your income plays a significant role in determining the interest rate on your personal loan. Lenders see higher income levels as a sign of financial stability, which can lead to more favourable loan terms. But if your income is on the lower side, lenders may view you as a higher risk, resulting in higher interest rates. This is because a lower income signals limited financial cushioning, which can make loan repayments more challenging.
Repayment history: A history of on-time repayments speaks volumes about your reliability as a borrower. Lenders usually review your past repayment records before approving your loan. If you have a history of missed payments or defaults, this suggests a potential for future payment issues, making you a riskier proposition. Consequently, borrowers with poor repayment histories often face higher interest rates as lenders look to compensate for the added risk.
Credit score: It’s a great indicator of your creditworthiness. A high score shows a strong track record of debt repayment, which reassures lenders that you will satisfy your repayment obligations. Lenders are able to provide borrowers with good credit scores with reduced interest rates because of this confidence. Conversely, a poor credit score indicates a history of past-due payments or unpaid obligations, which may make you a bigger risk to lenders and result in higher interest rates or even loan denials.
Debt-to-income ratio: One important metric used by lenders to evaluate your financial health is your debt-to-income (DTI) ratio. A high debt-to-income ratio indicates that a major amount of your income is already going towards debt repayment, which makes taking on further debt challenging. In response, lenders could opt not to grant the loan or raise the interest rate to cover this risk.
Understanding these key factors and prioritising improvements in areas like credit score, repayment history and DTI ratio can make a significant difference in the terms you receive.
While there's no surefire method to lock in a low interest rate for your personal loan, these strategies can improve your chances:
Improve your credit score: Your credit score is one of the most important factors influencing the interest rate you’ll be offered. A score above 750 is considered excellent and will likely result in more favourable rates. To improve your score, start by regularly checking your credit report for inaccuracies and correcting any errors. Keep your credit utilisation ratio under 30% on all credit cards and prioritise making on-time payments for all your loans and bills. Keeping your spending habits in check and using credit responsibly can have a noticeable impact over time.
Maintain a solid repayment history: Lenders look closely at your past repayment behaviour to gauge your reliability. A strong repayment history, including timely payment of EMIs and credit card balances, helps build the lender’s trust in you as a borrower. Consistently paying off your debts not only boosts your credit score but also signals financial discipline — an attribute that can lead to lower interest rates.
Reduce your debt-to-income ratio: Your DTI ratio shows how much of your income is already committed to paying off debts. A lower DTI ratio suggests to lenders that you’re not overextended financially and can handle additional debt. To lower your DTI, focus on paying down high-interest loans first.
Shop around and negotiate: Don’t settle for the first offer that comes your way. Rates can vary widely across different lenders, so take the time to compare loan options. Online tools and financial platforms can help you compare interest rates from various lenders, making it easier to find the best deal. Don’t hesitate to negotiate with lenders; sometimes, expressing a willingness to switch to another provider can lead to better terms.
In conclusion, getting a personal loan with a low interest rate can make a substantial difference in the amount you pay over time. By familiarising yourself with the factors that impact interest rates and taking proactive steps to improve your financial profile, you can increase your chances of obtaining favourable loan terms.
In partnership with four lenders, Moneycontrol offers fast access to loans up to ₹15 lakhs. There are no hidden fees, interest rates start at 12% annually, and the entire process is digital.
Applying for a personal loan has never been easier with digital lending platforms. Learn how factors like income, credit score, and repayment history impact your loan’s interest rate and how to improve your chances of getting a low rate.
Disclaimer
This piece/article was written by an external partner and does not reflect the work of Moneycontrol's editorial team. It may include references to products and services offered by Moneycontrol.
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