An unsecured personal loan is a way to finance the gap in your expenses. These loans provide a high level of flexibility in terms of borrowing a loan and its repayment period. In addition to this, as a borrower, you do not have to provide any collateral. This makes it easier for us to use a personal loan when we are witnessing a financial crunch.
When you borrow a loan, you will be expected to sign an agreement to repay the loan amount that you have borrowed along with an interest fee. The rate of interest is the money that you pay for borrowing money from a lender or any financial institution.
As there are several lending institutions and lenders, the rate of interest that you may be offered will also vary accordingly. The more the rate of interest rate, the more you have to repay to the lender. So, how can you get a personal loan at a low-interest rate? Let us explore more about this.
5 factors on which interest rate depends
The lender cannot decide the rate of interest randomly without assessing your profile. Certain areas will be assessed before giving out the decision. Listed below are 5 such factors on which the rate of interest depends:
1. Credit score
There are three Credit Reference Agencies (CRAs) which records your financial behavior to prepare a credit report. Your credit score is an indicator of how well you are performing financially. Hence, lenders take credit scores into account while assessing your loan application to evaluate your creditworthiness and affordability. If you have an excellent or good credit score, the interest rate that the lenders may offer will below. Similarly, if your credit score is low, then the rate of interest that you may find will be high.
2. Employment status
Lenders will also want to know whether you can afford to borrow a loan. If you are not employed that implies you do not have a source of income. And there is a risk that you may not pay the lender and they may not recover what you owe to them. Therefore, the majority of lenders prefer to lend money to applicants who have an active employment status to repay the loan that they are considering to borrow.
3. Debt-to-income ratio
The debt-to-income ratio is the ratio between your monthly income and monthly debt repayments. It is not considered by all the lenders but some may take it into account while assessing your loan application. If you have a good debt-to-income ratio, it shows that you are not struggling to manage your finances. While a low score indicates that you are facing difficulties, and that may create a blocker in your path for getting a loan.
4. Loan term and amount
The term and the amount that you are planning for will also impact the interest rate. If you are borrowing a short-term personal loan, the amount that you may borrow will be less. That means the interest rate on these loans will be high. However, if you are taking out a considerable amount for a longer duration, the rate of interest will be low. Therefore, choose your loan term and the amount carefully.
Collateral plays an important role while assessing your loan application. Personal loans are generally collateral-free. That means you do not have to offer any collateral to avail of the loan. So, if you default, the lender doesn’t have anything to recover the money you owe to them. This is the reason, the rate of interest on personal loans is comparatively higher than loans that are secured against collateral.
How do I get a personal loan at a low-interest rate?
Before you apply for a personal loan take out some time to evaluate your current financial circumstances. Review your credit report thoroughly and raise a flag to the CRAs if you spot any errors. Anything wrong on your credit report will directly affect your loan application approval and the interest rate that you will be offered.
The most important thing you must do to get a personal loan at a low-interest rate is – compare loans. As different lenders have different lending criteria, the rate of interest that they will propose may also vary. To find a personal loan offer that has the lowest interest rate according to your credit profile you need to compare multiple loan offers.