How Credit Scores impact Personal loan interest rates
When you take a loan from a financial institution or an NBFC, it is important to know what drives the specific interest rates. Rates change depends on the various factors concerning your credit score, income, employment status, etc. However, these factors may vary from one financial institution to another.
The rate of interest on a personal loan differs for each applicant as well as each lender. This occurs because banks determine interest rates based on the credit profile of the applicant.
When it comes to personal loans, the rate of interest is generally higher as it comes under the category of unsecured loans that require no collateral. The rates that will be offered to the borrower differs according to the credit score. The minimum cibil score required to get a personal loan is 750. On the other hand, if you do not have an optimum score, the chances of getting a low-rate personal loan might become difficult.
Which factors decide the rate of interest?
Certain factors affect the rate of interest on a personal loan. Some of them are given below-
Income: Your income is one of the most important factors that help the financial institution in determining the rate of interest on a personal loan. If you earn a higher income, lower will be the interest rates. Alternatively, if you have a low-income, the rates, in that case, will be significantly high.
Type of organization: The kind of organization you are working with also affects the rate of personal loans. If you work for a reputed organization, chances are that you will be earning a higher salary. This will in turn help you avail of the lower interest rates and vice versa.
Credit history: The main player of the interest determination is your best credit score which spills the beans of your previous and current borrowings and your repayment history. If you have been steady with your loan repayments, your credit score is likely to be higher. Banks use this score to evaluate your repayment capacity and your chances of making defaults on the loan.
What should be done?
Before applying for a personal loan, you should know your cibil score. If you have a good credit score, you can make use of it to negotiate the rates and even the processing fee with the lending institution. You need to buckle up and make sure that you must maintain your credit score as it could become the key that unlocks the doors of finances for you.
