Different financial institutions offer different rates on different types of personal loans. Given that there are no limitations on how they can be used, personal loans are among the most flexible financing options. However, they’re also on the higher side when it comes to interest rates, so as a borrower, you need to ensure that you’re able to repay the amount you borrow before you apply for a personal loan.

How is the interest rate on a personal loan determined? 

Interest is a fee levied on the borrower for the loan amount issued. The interest rate could be viewed as the ‘cost of money’ because it is a fee you are paying to get money that you don’t yet have.

Interest is levied based on risk or creditworthiness

When the lender determines that the borrower poses a minimal risk, the interest rate is reduced. The cost of the loan will increase if the borrower is judged to be high-risk.

Evaluating a personal loan

Personal loan interest rates range anywhere between 7.90% to 49% per annum! 

Typically, a good personal loan interest rate will be less than the national average individual loan interest rate. That average can change over time because interest rates might differ depending on a number of variables, including economic conditions.

Consider the following comparisons while evaluating offers:

• Annual Percentage Rate: APR reflects the overall cost of your loan and includes both your interest rate and fees. When doing a price comparison, it's perhaps the most crucial piece of information.

• Loan tenure: This indicates the duration to pay off the loan or how many instalment payments there will be. Shorter loan terms frequently result in lower APRs.

• Fees: Be aware of each lender's origination, late, and other fees.

• Monthly payments: Understanding your monthly payment and whether it fits within your present budget is crucial given the APR and loan tenure. Take the help of EMI calculators to get clarity on how much you need to pay every month.

• Discounts: You may get a loan from a financial institution where you already have other accounts or set up automated payments to lower your rate.

Factors that affect your personal loan interest rate

Interest rates for personal loans vary across borrowers and lenders. Several lenders provide personal loans at various interest rates depending on your creditworthiness. A good CIBIL score typically entitles you to low-interest loans.

Lenders take a number of factors into account when setting personal loan interest rates. You can play this to your advantage by improving the factors influencing interest rates. 

Personal loan providers base their interest rates on risk, which means they will consider your likelihood of defaulting on the debt while setting your rate. Here are some factors considered:

Income

A high-risk borrower is more likely to miss payments on a personal loan. Your capability to pay back the loan in time is ensured to the lender by studying your monthly income. 

If you’re self-employed, then your IT returns will be required as proof to check your repaying ability.

CIBIL score 

Your CIBIL score is one of the most crucial elements that define your creditworthiness. Lenders check your CIBIL score before deciding on the terms of your loan. 

Repayment history

Lenders will view your credit profile as low-risk for any new loan, including a personal loan if you have a strong payback history.

Additionally, this demonstrates sound money management, which boosts your trustworthiness. You may use personal loan EMI calculator to work out if you’ll be able to pay back the EMIs on your loan.

Economic conditions and other market factors

The cost of your loan is impacted by a number of factors, including inflation, the economy, repo rates, and more. Lenders charge greater personal loan rates during inflation than they do during a recession. 

Lower interest rates are also a result of low repo rates. Even if you have no influence over them, you can try to take advantage of them by borrowing money when interest rates are low.

Past association with the lender

If you’ve borrowed from the lender before, they might provide you with a personal loan with favourable interest rates.

Want to read up more? Here's a short guide on choosing an interest rate that works for you and your money.

Summary

Getting personal loans at good interest rates are subject to a range of factors from your credit score, your monthly income, repayment behaviour and macroeconomic conditions. You can get an instant loan directly to your Savings Account through the Fi Money app. These are pre-approved personal loans made available to select users with good credit scores. On Fi, this process is 100% paperless, and the loans are provided at competitive interest rates — where each user remains in control with complete visibility of all details. Plus, you can avoid EMI late fees by setting up automatic in-app payments. Our partner bank, Federal Bank, assigns an eligible loan amount to each user (up to ₹5 lakh).

Frequently asked questions

1. What is an ideal interest rate for a personal loan?

An ideal personal interest rate should be lower than the national average.

2. How do I get a low interest rate on a personal loan?

You can get a low personal interest rate by maintaining a proper CIBIL score, a decent repayment history, and an honest relationship with the lender which further allows them to trust you. 

3. What is the average interest rate on personal loans?

Personal loan interest rates in India typically fall within the range of 10.50% to 24% per annum, but the specific rate you receive depends on factors like credit score, income, employer, and age. Before applying, it is crucial to compare interest rates from various lenders to make an informed decision.

4. What is the lowest interest rate available on personal loans?

The interest rate may vary from customer to customer depending on certain factors, customer's including credit profile and relationship with the bank, to name a few.