How to Get a Lower Interest Rate on a Personal Loan?

6 ways to do this

Generally, before sanctioning a personal loan, lenders consider many factors such as the loan amount you have applied for, your repayment capacity and maybe even the company you are working for. Interest rates on personal loans are usually higher than those on others like home and auto loans. Therefore, when applying for a personal loan, try and get one at the lowest interest rate feasible, given other constraints. Here are six ways to get a better interest rate.

Maintain a good credit score

Improve your credit score by gradually clearing your debt and dues. A score of 750 and above gives you a higher chance of bagging a better personal loan deal. A few ways to do this are by maintaining your credit utilisation ratio within the 30 percent limit, checking your credit report regularly, avoiding direct loan and credit card applications to lenders and maintaining a healthy credit mix of both secured as well as unsecured loans. Also, you should monitor your guaranteed or co-signed loan account to ensure timely repayment, as delays or missed payments can harm the credit score of both co-signor/guarantor and primary borrower.

Maintain a good repayment history

Try to pay your credit card bill in full and clear off your debts every month. You should also pay EMIs of other loans, if any, on time. This helps you in getting a better deal whenever you take another loan in the future because if your EMI repayment history is good, you will have a better chance to negotiate on interest rates with the lender.
Compare interest rates, look out for seasonal offers

Based on your loan eligibility and requirement, consider visiting an online financial marketplace to compare and choose among various lenders. Additionally, check with your existing lenders as they often offer personal loans at a relatively cheaper interest rate and better service terms due to your pre-existing relationship. During the festive season, banks launch attractive schemes offering personal loans at lower interest rates. It might be beneficial to avail the loan at such times.

Check the interest calculation method

It may happen that despite the lender giving you a lower rate on the loan, you actually end up paying a higher interest amount at the end of the loan tenure. This is because the method of calculating the total interest payable can differ among lenders, so you should understand this method of calculation. The lender may give you a loan either at a flat or a reducing interest rate. In case of flat interest rate, the payment of interest is calculated on the full loan amount throughout its tenure. In case of reducing interest rate, the payment of interest is calculated on the outstanding principal, where EMIs gradually reduce the principal amount. This way, availing a personal loan at a flat interest rate could cost you more than availing a personal loan at a reducing interest rate.

Credibility of employer

Employees working with reputed/blue chip companies, multinational companies etc. may be able to get favourable deals. This is because their employers’ ability to provide a steady job is higher and therefore lenders expect that the borrower is more likely to have a stable income and repay the loan dues on time.

Your employment history

Job and residential stability and maintaining good FOIR (Fixed Obligation to Income Ratio) help build a good credit score which partly impacts the interest rates too. Many times before sanctioning the loan, the bank requires you to have an employment history of at least two years, including one year with your current employer. Lending institutions look favourably at loan seekers employed with the state or central government, PSUs or quasi-government organisations. This reflects in the interest rates offered. Further, your reputation and financial stability can also play a role in deciding the loan interest rates.

Points to note

1. It is prudent to check what the personal loan offers. Basically, one should check the service terms offered by various lenders before zeroing in on any lender. Make sure you base your decision not only on the interest rate offered but also on loan tenure, processing fee, prepayment charges, loan amount etc.

2. The lender may not give you a good deal if you have already taken too many loans. Also, if your CIBIL score is below 700, then it can even lead to rejection of your personal loan application.

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