It can be quite difficult to decide which is the best personal loan option. There’s so much to think about as there are so many options to choose from, figure out what’s the best interest rate for you and your employment situation. To help you make an informed decision, you can even turn to online aggregation platforms that can help you determine which is the best option for you.
There are certain factors that the lender will consider before approving the loan for you. Personal loans generally have higher interest rates; therefore, you need to find the most economical one. Personal loans are unsecured and easy to obtain, and in many cases you can even get approved within 24 hours. Now, where would you use a personal loan? You can use it for any kind of emergency, be it marriage, health care, education, etc.
How do personal loan interest rates work?
The best way to understand interest rates on personal loans would be to understand what personal loans are.
The personal loan is a type of closed credit with fixed monthly payments over a period predetermined by the financial institution. It can be anywhere between three, four or five years.
Now, the financial institution will assess the interest rate based on the principal amount you borrowed and is expressed by the lender as a percentage. The rate applied to your loan will include all fees and other costs and is also known as the nominal annual percentage rate or APR.
Personal loans are generally unsecured and charge a higher interest rate than secured loans. Unsecured means the personal loan program is not backed by any collateral or recoverable asset.
How to determine the best interest rates for your personal loan?
- Work history and employer credibility
- Compare interest rates and offers
- Good credit rating and repayment history
- Check the interest calculation method
- If your loan is a fixed or variable rate loan
- Secured or unsecured loan
- Reimbursement deadline
Work history and employer credibility
Many lenders will check your work history, job stability, residential stability, etc. All of this, along with your ability to repay and your obligation to fixed income (FOIR) ratio, will determine the interest rates the lender will set for you. It might not be required, but if you’re a government employee, you might have a better chance of getting a lower interest rate than someone who doesn’t work with the government.
Now, you may or may not work in a government job, but that doesn’t always have to be a deterrent. Even if you work in the private sector, the lender might search for your employer. Multinationals, reputable companies in various sectors that have a good reputation and are used to offering stable career options and good salaries can be a factor in the amount of interest rates you are charged.
Compare interest rates and offers
Many aggregation platforms are available today to help you make an informed decision. Once you know your eligibility and requirements, you can choose to visit one of the financial websites that compare various lenders that offer personal loans.
Don’t underestimate a good relationship. If you already have a long-standing relationship with your bank or non-bank financial company (NBFC), go ahead and follow their advice. They may be able to customize a plan for you, tailored to your needs.
Good credit rating and repayment history
A rather crucial factor. A good credit score would mean a score of 750 and above. This would give you a better chance of getting a better interest rate. You should be able to maintain a good credit rating if you’ve avoided direct loans and credit card applications.
Making timely payments for any loans you may have also bodes well for your credit rating, which in turn affects the interest rate determined for you. Paying your EMIs on time if you have any or paying your credit card bills on time are factors that are noted by the lender and make you a respectable and safe borrower.
Check the interest calculation method
Try to understand the finer nuances of how your interest is calculated. Different lenders may give you different interest rates, and while some may seem lower initially, you might end up paying higher interest at the end of the term due to the way they are calculated.
If your loan is fixed or variable rate:
As the title suggests, fixed rate loans will have a fixed interest rate, which does not change over time. It will remain the same with the same monthly payment and the same interest rate. As for variable rate loans, they usually start low compared to fixed rate loans and therefore may make you feel like they are better than a fixed rate loan.
But over time, the interest rate can vary on the variable interest loan and this can completely upset your budget. Therefore, fixed rate loans are always a better idea because you know that regardless of the market situation, your interest rates will not increase.
Secured or unsecured loan
In secured or unsecured loans, the biggest feature is that in the case of a secured loan, you take the personal loan on the basis of an asset or a security, say, for example, a property or a vehicle, etc Secured loans are better, in the feeling that they are easier to obtain and your credit score is not a key factor.
Second, if you do not repay a secured loan, the financial institution may withdraw your security. In a secured loan, the risk is lower for the lender, so the rates are lower compared to unsecured personal loans.
If you were to opt for unsecured personal loans, your credit score must meet the target for you to qualify. Also, if you are unable to repay the unsecured loan, the lender may sue you to recover their lost funds.
Interest rates are higher when money is borrowed over a longer period. This is because the risk for the lender is higher. Therefore, personal loans taken out for a shorter period are better and have lower interest rates due to lower risks for the lender.
Therefore, it would always be prudent to compare interest rates from multiple providers. As you can see, the factors that determine a lower interest rate are many: the weather, whether it’s secured or unsecured, whether your loan plan is fixed or variable, whether you have a good credit rating and a good repayment history, whether you have a stable income or not, etc.
Beyond the points mentioned above, there are some very important factors to remember when calculating your interest rate. You must understand that it is not always prudent to base your personal loan on the interest rate, but also to take into consideration the term of the loan, the amount, the prepayment charges, the processing fees, etc. . Also, as mentioned above, watch out for your credit score. Check the documentation you may need to qualify for a personal loan.
Opting for a personal loan should be simple and hassle-free. Filling out tons of paperwork is the last thing you want to do in an emergency. It would also be prudent to look for flexible payment options. In these times of hardship and uncertainty, flexible reimbursement schemes might be the best bet, as they will allow you to spread your EMIs over a longer period of time and you can pay more or less depending on what you can afford. to allow.