Personal loan borrowings have been on the rise in India owing to various reasons. In the FY 2023, outstanding personal loans in India amounted to 40 lakh crore– which was a 20.4% increase as compared to the statistics in February 2022. One of the major reasons for this is how convenient banks have now made it for customers to access instant personal loans. IndusInd Bank, for instance, offers personal loans that require no physical documentation and have a convenient application procedure, making them accessible to all borrowers. While it’s easy to avail a personal loan now, it’s also crucial to understand the importance of personal loan interest rates. This can make loan repayment and management as seamless as applying for a personal loan.

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Which factors determine a borrower’s personal loan interest rate?

The borrower’s monthly income affects their personal loan interest rate:

One of the major factors that determine a borrower’s personal loan interest rate is their monthly income. Banks generally charge a lower interest rate to borrowers who have a higher income. A higher monthly income is typically indicative of good financial health, thereby indicating that the borrower in question has the capability of repaying their dues in time.

Borrower’s repayment history is considered while deciding on the interest rate:

While assessing any personal loan application, banks also assess the borrower’s repayment history. This includes all the debt that the borrower has taken in the past including their credit cards, personal loans, and home loans, if any. If the borrower has a credit history that shows missed or late payments, banks generally offer them a higher rate of interest.

They also consider the borrower’s creditworthiness:

Banks also assess the borrower’s creditworthiness before approving a personal loan request. A credit score that lies between 750 and 900 is considered good and borrowers who have such a credit score can easily avail lower interest rates on personal loans.

Personal loan interest rates are also affected by the relationship between the borrower and the lending bank:

Having a long-standing relationship with the bank can also help the borrower avail a low-interest personal loan. If the borrower in question is a trusted customer who has built a good relationship with the bank, they can benefit from this trust by availing a low-interest personal loan.

Banks also consider the borrower’s debt-to-income ratio:

The debt-to-income ratio of a borrower is the ratio of the total debt that the borrower has currently to their total income. The debt-to-income ratio of a borrower must generally be low for them to get a low-interest personal loan.

The bank also accounts for the borrower’s history of defaults:

If the borrower has failed to pay an EMI (Equated Monthly Instalment) on time, the bank considers it as a default. The bank also assesses all instances of defaults in the borrower’s repayment history before sanctioning a personal loan.

Which other personal loan features must borrowers prioritise besides loan interest rates?

While considering the personal loan interest rate is important, there are also some other features that borrowers must prioritise. These include:

Borrowers should choose a bank that offers an instant personal loan:

Instant personal loans, like the ones offered by IndusInd Bank, are affordable and easily accessible online.

They should prefer a bank that helps them know their EMIs in advance:

IndusInd Bank’s personal loan EMI calculator can help customers estimate the value of their EMIs in advance.

Borrowers must choose a personal loan with a flexible loan tenure:

IndusInd Bank customers can choose a flexible loan tenure between one and four years when applying for a personal loan.

The personal loan must have a comprehensive interest rate:

Borrowers must prioritise a personal loan that offers low interest rates such as IndusInd Bank.

Ending note

The interest rate offered is one of the most important aspects to consider when applying for a personal loan as it determines the cost of borrowing. In addition to the interest rate, borrowers must also consider other important features such as a flexible loan tenure and the availability of online instant personal loans.