A personal loan is a short-term unsecured loan sanctioned by the banks, based on the credit score of the borrower. As personal loans are unsecured loans, banks charge a higher interest rate on such loans. The rate of interest varies across lenders and is determined based on the income, credit score, employment type and debt-to-income ratio of the borrower.
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See Also: Types of Personal Loans
Credit Score: Credit score is a 3-digit representation of a person’s credit worthiness and is a summary on how responsibly he/she manages the loan EMIs and credit card bills. A good credit score is around 750 and above. A person with a good credit score gets a personal loan sanctioned easily, as banks are confident that such a person would not default.
Income: Income is an important factor while getting the personal loan sanctioned. Banks consider high income borrowers to be more stable, as they are able to repay the personal loan without any difficulties. However, all borrowers must meet the minimum salary requirement as specified by the bank. Banks then evaluate your debt to income ratio and set interest rate and loan tenure accordingly.
Your Employer and Nature of Employment: Banks generally prefer salaried people working with MNCs and also government employees. A stable job means steady income and the personal loan is easily sanctioned.
Defaults: A loan default negatively impacts credit score and the personal loan application might be rejected. Even if the banks approve your application, they will charge a higher interest rate or may ask for a co-applicant. Banks prefer borrowers with no loan defaults in the past 12 months while sanctioning personal loans.
Relationship with the Bank: A good relationship with the bank helps you avail a personal loan at low interest rates. Have an account at the bank where you intend to avail a personal loan.
Maintain your Credit Score: A credit score is a numerical summary of credit worthiness. A credit score reflects repayment history and debt management. All banks and lending institutions check your credit score before sanctioning a loan. A person with a good credit score is considered to be reliable and banks sanction the personal loan. To maintain your credit score, pay all your credit card bills and loan EMIs on time.
Choose the Right lender: While maintaining a good relationship with your bank, don’t ignore offers on personal loans from other banks. Before finalizing your lender, make sure to compare interest rates offered by different banks. Check the various terms and conditions like pre-payment charges, processing fees and other hidden charges. You might get a lower interest rate, but the hidden charges may end up making your personal loan costly. So, choose a good lender to avail best interest rates on your personal loan.
Pay your Existing Debt: The banks consider debt to income ratio as an important factor while determining personal loan interest rate. Debt to income ratio is calculated by summing up your monthly debts and dividing it by monthly income. A person with a higher debt-to-income ratio may not be considered reliable and banks hesitate to sanction the personal loan. Banks generally reject such loan applications or give loans at a higher interest rate. So, before applying for a new loan, repay existing debts and enjoy better interest rates.
Apply with a Co-Applicant: A person with a lower credit score may choose to apply for a personal loan with a co-applicant. A co-borrower can be anyone i.e. spouse, friend, relative or parent. Banks look at your eligibility and also the co-applicants eligibility, before sanctioning the personal loan. Applying for a personal loan with a co-applicant who has a good credit score, helps qualify for personal loan with lower interest rates.
See Also: 10 Tips While Taking a Personal Loan
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