A Comprehensive Guide On The Importance Of Personal Loan Interest Rate
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When applying for a Personal Loan or any other financing option, it’s important to check the interest rate as it determines your total debt. Any changes in the interest rate, whether it goes up or down, will impact how much you need to repay.
Why Is Interest Rate Important For A Personal Loan?
For instance, if you take a personal loan of Rs 2 lakhs at 12% interest for 5 years, your EMI will be around Rs 4500. If the interest rate drops to 10%, your EMI will be around Rs 4300.
Although a difference of Rs 200 may not seem significant, it can add up over time. For example, at a 12% interest rate, the total interest payment will be about Rs 67,000, while at 10% it will be about Rs 55,000, resulting in a difference of about Rs 12,000.
Top 3 Factors That Determine Personal Loan Interest Rate
Here are the factors that determine the interest rate on Personal Loans –
1. Your credit profile
Your credit profile plays a massive role in deciding the interest rate on your Personal Loan. This financial product being unsecured, the financiers put special emphasis on your credit profile before approving your loan application.
So, a good credit score, i.e. 750 or above, portrays you as a responsible borrower. Also, if your credit repayment history is clean and devoid of any defaults, it further enhances your creditworthiness as a borrower.
Once you have these two things in order, you are likely to receive a better loan interest rate.
2. Your income
The next point that lenders look at is a borrower’s repayment capacity. If you work in a reputed public or private organisation or run a profitable business, and meet the income requirements set by the lender, then you are good to go.
3. Existing debts
The next factor that considerably affects the interest rate is whether you have any current debts or not. Therefore, if you are debt-free, you can solely focus on repaying this credit. In that case, financiers will consider extending a lower interest rate, and vice versa.
These are some of the primary factors determining your Personal Loan’s interest rate. If you can take care of them, you will be in a position to get a better loan deal. Now, let’s take a look at how to calculate it.
How To Calculate Personal Loan Interest Rates?
Whether you are taking an online debt consolidation loan, a medical loan, or a travel loan, the interest calculation of a Personal Loan remains the same. Now, there are two ways to achieve this result, and they are manual and online. For manual calculations, you can use a simple mathematical formula. Whereas for the online analysis, take the help of online EMI calculators.
Wrapping Up
Now you have an idea of the effect of interest rates on a Personal Loan, the factors that determine it and how to calculate one. Use the above-mentioned pointers to your benefit and make an informed decision.