What are the factors that influence personal loan interest rates?

JohnDecember 10, 20220155 views

In this article, we will discuss the factors that influence personal loan interest rates. Personal loans are one of the easiest ways to fund your urgent cash requirements. While personal loans are mostly offered by banks to existing customers, the interest rates might not be the same for all. The interest rates depend on various factors and we will go through them in detail.

Table of Contents

Factors that Influence Personal Loan Interest Rates

Whether you can afford a personal loan or not depends a great deal on the interest rates. Banks offer different interest rates to different individuals based on a number of factors. Let us look at what contributes to the calculation of the interest rate for personal loans.

Income Level

The income level has a great deal of impact on what interest rate the bank would charge for a personal loan. The higher your income is, the higher the chance of availing of a lower interest rate. This is because the bank wants to know how easily you can pay the loan back. We can say that income level and interest rates are inversely proportional.

Workplace Reputation

Individuals working in big multinational companies have a higher chance of getting a lower interest rate for a personal loan. This is because job security is higher in these known organizations. They have a relatively stable career and growth path and hence their income will most likely not be affected negatively in near future.

Credit History

While evaluating the application for a personal loan, a lender is most likely to check the credit report and scores of the applicant. A credit score is a three-digit number given by credit bureaus after considering a lot of factors. The lenders usually refer to reports from CIBIL^TM, Equifax, Experian, and CRIF Highmark, as these are RBI-authorized credit bureaus in India. The credit report and scores talk about the past credit repayment discipline of the applicant.

Loan Payment History

Your loan repayment discipline in the past is being closely observed by lenders. They consider it as a benchmark for all future repayments too. Typically, they would like to know if there have been any defaults in the last 12 months. Applications by defaulters are mostly rejected or approved with a very heavy rate of interest.

Loyalty with the lender

Your loyalty to the existing bank where you have your account plays a role in the determination of interest rate. How many accounts, fixed deposits, etc. you have with them would have made you a loyal customer. Loyal customers get a good rate of interest for maintaining a good relationship with the bank.

Economic conditions and other market factors

If the economy is flourishing, you might be able to get a good interest rate since there will be fewer people applying for loans. However, if there is inflation or recession, it is highly likely that the interest rates would not be too low.

That is because the demand for loans would be very high in the scenario of inflation or recession. Changes in repo rates also affect the interest rates. The Repo rate is the rate at which banks borrow funds from the Reserve Bank of India (RBI). If the repo rate is high, the interest rates on personal loans are bound to be high.

What is a Personal Loan?

Personal loans are an easier and faster way to get instant funding for several reasons like medical expenses, vacation costs, etc.

Key highlights of a Personal Loan

Personal loans are generally offered by banks to existing customers.
Personal loans are unsecured loans which means you do not need a security/guarantee to get the loan
Personal loans have flexible payment tenure usually ranging between 12-60 months.
Personal loans have a flexible end-use. They can be used for various purposes like medical expenses, wedding expenses, home renovation expenses, vacation expenses, education funding, paying off a higher-interest rate loan, purchase of electronics, etc.
Personal loans generally have a quick disbursal time.
Personal loans need minimum documentation as it is generally offered to existing customers and the bank will already have their details.

Personal Loan Rates by Top Banks

So, what is the average interest rate for personal loans? We have compiled a list of interest rates offered by the top banks.

	Loan amount	Interest Rate	Processing fee	Payment tenure	Credit score needed
HDFC	Up to Rs. 40 lakhs	11% to 21%	Up to Rs. 4,999	12-60 months	750+
ICICI	Rs. 50,000 to Rs. 25 lakhs	10.75% to 19%	Up to 2.5% + GST	12-60 months	700+
IDFC	Up to Rs. 1 crore	10.49% onwards	Up to 3.5%	Up to 60 months	700+
SBI	Rs. 24,000 to Rs. 20 lakhs	10.55% to 13.55%	1.5% + GST	6-72 months	650+
Tata Capital	Rs. 75,000 to Rs. 35 lakhs	10.99% to 24%	2.75% + GST	Flexible	750+
Kotak	Rs. 50,000 to Rs. 25 lakhs	10.99% onwards	3%	12-60 months	750+
Citibank	Rs. 10,000 to Rs. 30 lakhs	10.5% to 14.99%	2.00%	12-60 months	Not disclosed
InCred	Rs. 75,000 to Rs. 15 lakhs	16% to 36%	2% to 5%	12-60 months	750+
Standard Chartered bank	Up to Rs. 50 lakhs	11.49% onwards	Up to 2.25%	12-60 months	650
Bank of Baroda	1 lakh to 20 lakhs	10.20% to 17.55%	1% to 2% + GST	48-84 months	701

The above table gives you a fair idea of which bank has what offers for a personal loan. Now, let us look at the eligibility criteria for a personal loan from the same banks.

Eligibility Criteria for Personal Loans from Top Banks

	Age (in years)	Income
HDFC	21-60	Minimum Rs. 25,000
ICICI	23-58	Minimum Rs. 30,000
IDFC	25-55	Not Available
SBI	18-76	Minimum Rs. 15,000
Tata Capital	22-58	Minimum Rs. 15,000
Kotak	21-60	Minimum Rs. 25,000
Citibank	21-60	Minimum Rs. 25,000
InCred	21-55	Minimum Rs. 15,000
Standard Chartered bank	22-58	Minimum Rs. 22,000
Bank of Baroda	21-65	Not Available

Conclusion

Personal loan interest rates are determined by a number of factors. These include income level, past repayment history, association with the bank, credit score, workplace reputation, economic condition, and other market factors. Personal loans can be of great use in emergency situations and one must assess all available options before opting for one.