How To Get A Better Interest Rate On A Personal Loan

Getting a Personal Loan is a piece of cake these days. In fact, if you follow these pointers, you can even lock in a better interest rate.

Unlike secured loans like a Home Loan or Car Loan, for which you’ll need to pledge collateral, Personal Loans are unsecured loans that usually come with higher rates of interest. Thus, one of the foremost things to do before taking out a Personal Loan is to settle for a lender that gives you the lowest interest rate.

Before sanctioning your loan, the lender will consider a number of things to deem your creditworthiness. Here are some pointers to keep in mind if you’re looking to get a Personal Loan at a lower interest rate:

1. Your Credit Score Never Looked This Good

This is one of the first things that a lender will check to gauge the stability of your finances. A good Credit Score (around and above 700) will land you in the safe zone and will greatly boost your chances of loan approval. Here are a few ways you can keep your Credit Score in tip-top shape:

• Keep Your Credit Utilisation Below 30%: If you have a tendency to use your Credit Card frequently, remember to keep a lid on your credit utilisation ratio – the ratio of how much credit you have currently taken divided by your overall credit limit under 30%.
• Keep A Close Watch On Your Credit Report: Checking your credit report at frequent intervals will help you stay in the know of any errors, unexpected changes etc. that have made their way into your credit report. Credit Score inquiries with a credit bureau or an online financial marketplace are often free and are considered as soft inquiries. So, don’t worry about those inquiries tanking your Credit Score.
• Don’t Make Multiple Loan Applications: Making multiple Credit Card applications makes you appear credit-hungry to lenders. In fact, each loan application results in a hard enquiry and affects your Credit Score. So wait out a few months before you make another loan application if you’ve faced loan rejection recently.

If you have a guaranteed or co-signed loan account with your spouse/partner, monitor payments there as well.  Delayed/missed payments on account of your partner will impact not just theirs but even your Credit Score.

Additional Reading: Can You Get A Personal Loan With A Low Credit Score?

2. Maintain A Good Repayment History:

Credit Cards can come real handy when there are unanticipated expenses to take care of. However, given their high-interest rates, you should really be mindful about paying off your Credit Card bills in full and on time every month. This makes you look like a responsible borrower to your future lenders, not to mention how it helps your Credit Score stay in tip-top shape as well.

Additional Reading: Your Personal Loan Eligibility Checklist

3. Compare And Shop Around:

If you’re mulling taking out a Personal Loan, a good place to start would be to first check your loan requirement and eligibility. Instead of spending hours on every bank website scouting for the best Personal Loan offer, consider visiting an online financial marketplace to compare and choose among various lenders. Another wise thing to do would be to check with your own bank. Often banks that you have an existing relationship with will offer cheaper interest rates and better terms of service.

Many banks in order to drive up their sales during festive season launch some really compelling Personal Loan schemes like low-interest rates, zero processing fees etc. You could consider taking a Personal Loan during this time to take advantage of these benefits. However, remember to read the fine print regarding the rates, fees and charges as some of these promotional rates may not apply once the season is over.

4. Look Out For The Interest Calculation Method:

It is possible that at the time of taking the Personal Loan, you settle for a lender that offers you the lowest interest rate, but at the end of the loan tenure, you end up paying a higher interest amount. This could be attributed to the difference in the method of calculating the total interest payable by lenders. This is one of the foremost things to look out for before taking a Personal Loan.

Lenders usually follow two methods of calculating their interest rate – flat interest rate and reducing interest rate. In case of flat interest rate, the payment of interest is calculated on the full loan amount throughout its tenure. In the case of reducing interest rate, the interest will be calculated on the outstanding principal. Here, EMIs will gradually reduce the principal amount. Thus, availing a Personal Loan at a flat interest rate could cost you more compared to a reducing interest rate.

Additional Reading: 6 Mistakes To Avoid In A Balance Transfer

5. Stable Income And Employment History:

Individuals working with reputed/blue-chip or multinational companies are likely to get a more favourable deal. This is because their employer’s ability to provide a stable income is higher. Usually, lenders will perceive such individuals to have a stable income and more capable of repaying their dues on time.

Many lenders also prefer that you have an employment history of at least two years. This includes one year with your current employer. Lenders also view those who’re employed with the state government, central government, PSUs or quasi-government institutions as more attractive borrowers. Besides this, your residential stability and a good FOIR (Fixed Obligation To Income Ratio) are other factors that lenders look at when evaluating your loan application.

Before signing the dotted line for any Personal Loan offer, check and compare the service terms offered by various lenders. Ensure that you base your decision not just on the interest rate but also other factors like loan tenure, processing fee, prepayment charges, loan amount etc.

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