Factors That Determine Your Personal Loan Interest Rates

Factors That Determine Your Personal Loan Interest Rates


Personal loans have completely changed the consumer finance landscape in India in the last few years. The most basic aspect of a personal loan that everyone must be aware of is the rate of interest. Higher ROI means you end up paying back more. If you are looking for an instant personal loan, here is a handy guide about the factors which play a role in determining what rate of interest will be charged to you.

Factors That Determine Your Personal Loan Interest Rates

1. What is your credit score?

This is one of the key factors which will play a very important role in deciding the interest rate you have to pay. Your credit score is the indicator of your overall financial health. The higher your credit score, the better will be the offers from lenders. People who have credit scores of 750 and above are always preferred by all lenders, including conventional lenders as well as online personal loan providers. They get the lowest possible interest rates. People with low credit scores must pay higher interest rates.

2. Who are you borrowing from?

One thing that lenders always account for when they lend money to someone is their own cost of business. Conventional lending institutions have a much higher cost of operation as compared to personal loan online providers. They must maintain multiple offices and employees. On the other hand, app-based lenders who tend to do their business online have much lower operational costs. They do not have to maintain multiple physical locations and their HR costs are also low. All this allows them to offer attractive interest rates on their instant personal loan offerings.

3. How much amount you are borrowing?

One thing that most lenders tend to do is bracket the interest rates with the amount that an applicant wants to borrow. This means that by changing the amount you are looking to borrow, you may be able to reduce the interest rate as well. You will have to do a bit of experimentation for this. It is easiest to do this when you are looking for an app-based instant personal loan. Simply adjust the amount you are looking to borrow to see if you get a better deal on the loan interest rates.

4. What is your monthly income?

Your monthly income can be a deciding factor in how much you want to borrow. The basic concept is that to get the best interest rates, you should have a high income but must be looking for a low amount to borrow. If you do have a high income but want to borrow a large amount of money, be ready to pay higher interest rates. Similarly, people with lower incomes will be charged high-interest rates if they are looking to borrow near their capacity.

5. What is your debt-to-income ratio?

Along with your credit score, your debt-to-income ratio is another very important factor that lenders will consider before deciding the interest rate for your loan. The concept here is very simple. The lender will check what your total income is and then compare it to the amount you pay as loan EMIs every month. The higher your debt-to-income ratio is, the higher they will charge the interest rate because they feel that the borrower may be taking too much debt.

6. What is the proposed loan duration?

Many lenders also grade the interest rates based on the duration of the loan. They tend to charge higher interest rates on short to mid-term loan durations because these are the most chosen loan durations. On longer-duration loans, they may charge lower interest rates because even then they will get a good return on their investment. Again, if you are taking an instant personal loan from the app, move around the period slider to see if you get a better rate of interest!

7. Are you self-employed or salaried?

Many lenders also consider the source of income to be a key factor in deciding how much loan a person can take. People who are working with the government or with government-run entities as well as people working with MNCs tend to get the best interest rates. People working with big and established domestic firms also get good interest rates. On the other hand, people who are self-employed may have to shop around and be ready to provide a lot of paperwork if they want to get low-interest rates.

8. Are you a first-time borrower?

This is another factor that can play a role in deciding how much a lender will charge you as a rate of interest. In almost all cases, the people who are first-time borrowers will not have much of a credit profile to go by.  This means that many lenders may be wary to lend a first-time borrower.  Thus, be ready for higher interest rates if you are a first-time borrower.

9. Are you a returning customer for the lender? 

As with any other business, lenders also like to have returned customers and tend to offer the best deals for those who have come to them after paying off their current loan. Obviously, the people who are returning customers and have been well-disciplined with their previous payments tend to get the best deals. It is therefore recommended to stick to lenders if you think that there is a possibility of repeat business.


When all is said and done, your interest rate will be the single most important factor in almost all aspects of your loan, right from granting the loan to its final payment. Always try to get the best possible rate of interest that you can from the lender.