Personal Loan

Unseen Factors That Affect Your Personal Loan Interest Rate


Personal loans have been a resort to financial troubles for many. Multi-purpose loans help people accomplish a variety of monetary needs. From financing a vacation to debt consolidation, these loans, with their accessible financing options, are the choice for many borrowers. 

As these loans are not secured and do not involve any collateral, the personal loan rate of interest is usually higher than that of the secured loans. The personal loan interest ranges from 10% to 28% and differs from borrower to borrower. Several unseen factors affect the interest rates, which many loan buyers do not know. 

If you want to get a personal loan, you should compare and contrast the personal loan rates that banks offer you based on your qualifications. Furthermore, one must know about the factors affecting the loan rates in detail to make an informed decision. Read the complete article to understand your personal loan rates. 

Credit Score

Since personal loans are unsecured loans, your credit score plays a pivotal role in deciding if a lender will offer you the loan and at what interest rate. A CIBIL score signifies how you have performed with your previous loans. Timely payments against your loans help improve your CIBIL score. A CIBIL score of 750 or higher is considered strong and allows you to get loans easily. Furthermore, the higher the score, the lower the interest rate. 


Your income also hugely determines the personal loan interest that might be offered to you. Understanding the income factor is simple. The risk of providing loans to borrowers with higher incomes is lower than the risk of offering them to people with lower incomes. As a result, the personal loan rates for borrowers with higher incomes are lower than those offered to borrowers with lower incomes. 

Job Security 

Your source of income also impacts the personal loan rate you get. Anyone, who is self-employed, a business owner, or salaried can apply for a personal loan. Nevertheless, the interest rate depends on the security of the job. For example, borrowers working in government or private sector jobs can get better rates than self-employed people because of the job security and the lower risk involved in lending. 

Repayments and Defaults 

Your repayments are analyzed before going forward with your application and offering you the loan. If you have been regular and timely with the payments of your previous loans, then you can get a personal loan at a low rate of interest. However, if your lender notices any defaults in your previous loan repayments, then your loan application might be rejected, or you might be offered the money at a high rate of interest. 

Lender-Borrower Relationship 

Having bank accounts and fixed deposits with banks creates a positive interpersonal relationship with your lender. If you are borrowing the loan from the same bank with whom you have an account, then there are chances that you can get better personal loan rates here. Banks offer personal interests with lower rates to their loyal customers. 

Debt-to-Income Ratio 

The debt-to-income ratio is your debt payments divided by your total income. Suppose, you have a high-paying job. However, the majority of your income goes toward paying your previous debts. In such a case, your net monthly income is affected by the repayments continuing under your name. Consequently, a higher debt-to-income ratio signifies higher risk for lenders, which makes them charge a high-interest rate on your personal loan. 

Loan Repayment Tenure

Personal loan repayment terms are flexible, allowing borrowers to choose the tenure based on their comfort. Borrowers with a repayment tenure of 1-3 years get a lower interest rate. On the other hand, those with a stretched tenure of 3-5 years have to pay back the amount at higher personal loan rates. 

Employer Reputation 

The place where you work can also have an impact on your interest rate. If you are working at a reputed company that is more secure, then you might be offered a lower personal loan interest rate. On the contrary, if you are working in an unstable organization, like a start-up, then your interest rate can be higher. 

Things to consider before applying for a personal loan 

Several reasons can affect your personal loan rate. However, apart from competitive interest rates, you should also consider other factors before buying a personal loan. 

  • Compare and contrast the requirements that different banks offer you to buy a personal loan. Avoid banks that make it hard to get a loan. Instead, choose one that gives you easy money with less paperwork.
  • From the disbursal of the money to the repayment of the loan amount, loans can get messy. Consequently, it is advisable to choose a bank that has a reputed name in the market and offers you a good customer experience. It is also indispensable to consider how responsive your bank is. 
  • Before borrowing a personal loan, ensure that your bank is not charging any hidden fees, as this will impact your repayment amount hugely. Opt for a lender that is transparent with its terms and conditions. 
  • Personal loans are mostly required urgently. Before filling out an application to your lender, you must also confirm the duration of the fund’s transfer. While some banks can disburse the money within 24 hours, others can take up to 7 days. 


Although most of us know how our credit score can affect a personal loan’s rate of interest, other factors also determine your personal loan rate. Your high income, impressive employer’s reputation, and secure job can help you get a lower personal loan rate. On the contrary, a poor CIBIL score, a long repayment tenure, and defaults can lead to the rejection of your application or a higher interest rate. 

To read more such articles, visit the Piramal Finance website!