What are Personal Loans?

Personal loans are availed for any contingency expenses, wedding, home renovation, paying medical bills or even for consolidating debts. The borrower is free to use this loan for any purpose; however, he will need to present that purpose while applying for the loan. The primary factors that affect your application for personal loan are your credit score and repayment capacity. Personal loans usually come with shorter repayment periods, higher interest rates, and strict eligibility criteria. Before applying, it is a good idea to check for personal loan eligibility.

Interest Rates for Personal Loans

Interest rates on personal loans in India generally lie in the range of about 11% to 35%. Annual Percentage Rate (APR) are usually quite higher for personal loans compared to any other types of loans in India. This is primarily because of the fact that personal loans are basically unsecured debts. They do not come with any kind of collaterals or asset submissions. The three primary reasons for the higher interest rates include:

 

  • Collateral

 

Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act) allows banks and financial institutions to cease and auction the home, car, or commercial property in case of a default in home, auto, or commercial loans respectively. This means that the house, business property, or car act as collaterals for these types of loans. Hence, the risks for a bank or financial institution in home or car loans is much less. Whereas for personal loans, there are no collaterals and hence no guaranteed income for the lender in case of a default by the borrower. So, here the risk becomes high for banks. In order to adjust this risk factor, lenders tend to levy a higher interest rate on personal loans.  Risk rating is one of the prominent factors that helps decide the interest rate.

 

  • NPAs for Banks

 

Personal loans usually have a higher default rate than home or car loans because there is no asset security. Due to this, banks face increased percentage of Non-Performing Assets (NPAs). To compensate for the same, they need to charge higher interest rates on personal loans and educational loans – as they both are unsecured loans given out just on the basis of credit history and repayment capacity. For home and car loans, when the banks auction the property, it gets a chance to recover and reduce the NPA. However, there is no such opportunity in personal loans.

 

  • Urgency

 

Individuals opt for personal loans mostly in cases of urgency. These urgencies can be in terms of paying off debts, settling medical or hospital bills, wedding expenses, down payment for buying a car or home, etc. Banks and financial institutions take advantage of this situation and offer loans at higher interest rate. Also, personal loans are probably the only product for banks and NBFCs to levy extra charge on. With this, they try to bring down the overall NPA proportion of the bank’s total assets.

These are the reasons that banks cannot provide lower personal loans interest rates. Taking advantage of the situation and considering all parameters related to the profile of the applicant, amount of loan required, repayment capacity, existing borrowings, etc., they come up with a personalized interest rate for personal loans. Interest rate calculators would surely come handy while trying to finalize your lender for personal loan.

Requirements for Better Interest Rate on Personal Loans

As discussed, personal profile also matters quite a bit while the bank or financial institution decides on the interest rate for personal loan. So, there are definitely a series of things that you can do yourself in order to lower the interest rate on personal loan that the bank offers to you. Here are some of them:

  • Improve your credit score
  • Repay your existing debts
  • Include a co-applicant with a good credit score
  • Consider and analyse carefully the amount you need to borrow
  • Consider the loan duration that you wish to avail
  • Improve your debt-to-income ratio
  • Clarify the purpose of the loan from the beginning

Personal loan for self-employed individuals might have some more considerations including presenting the financial statements of your company or firm from the last few years. It is advisable to think from the perspective of the bank or the lender. If you apply a common-sense approach to what the bank might think of your application in order to decide the rate of interest. You might also carefully analyse the necessity of the personal loan. You should surely not avail it for the purpose of splurging and for avoidable spending. You must also not avail it while you are still rebuilding your credit worthiness. It is also prudent to carefully account for the money that you wish to borrow and ensure that you do not borrow more than what you can afford. You must also check out EMI calculators available online in order to understand the monthly payments you will need to make. According to this, you must carefully consider the monthly instalments as per the amount that you can definitely pay back every month.

Digital Instant Loans with Low Interest Rate

If you can secure a good interest rate on personal loan by keeping in mind all these factors, it might actually be quite helpful. Personal loan interest rates are much cheaper than that of credit cards, generally. This makes it a useful borrowing in case of a need to pay your credit card bills or consolidate your debts. However, the only key is to borrow it carefully and be responsible while actually using the loan amount. Payday loans could also be a legible option for you. However, you must first carefully evaluate the pros and cons of payday loans versus personal loans. For needs of smaller amounts, you can check out digital instant loans from PaySense. With an immediate disbursal of loans up to INR 2 Lakhs, we make it possible for you to address the urgency of fund requirements in three easy steps.