Dec 16, 2021
A Personal Loan can provide easy access to money when you need it the most for whatever purpose. You do not have to mortgage your existing assets (your house, family gold, jewellery, investments, etc). It is an unsecured loan that could be obtained without any collateral within 2 to 3 days (sometimes even on the same day provided you satisfy the eligibility criteria and the documentation is complete), and at times, it is pre-approved if you have maintained a high credit score. That’s why a Personal Loan is rightly called your ‘financial lifeline’ coming with a comfortable repayment tenure ranging from 12 months to 60 months.
Nevertheless, when you avail of a Personal Loan, the interest rate is a deciding factor that will determine how much the Equated Monthly Instalment on your Personal Loan will be. The higher the interest rate on the Personal Loan, the higher your EMI and vice-versa.
Here are five factors that determine the interest rate you pay on the Personal Loan:
1. Income – Since a Personal Loan is unsecured, lenders emphasize your income in the appraisal process. The bank/lender will assess your repayment capacity. If your monthly disposable income is low vis-à-vis the Personal Loan EMI, the bank/lender may levy a higher interest rate. This is because lenders fear a delinquency cost in such cases.
Conversely, if you have a high disposable income, you may be offered a competitive interest rate. This is because the bank views you as a borrower with low chances of delinquency risk. Axis Bank’s minimum net monthly income criteria for a Personal Loan is Rs 15,000.
2. Employment details – Other than income, banks also check your employment details -- whether you work for a private limited company, public limited company, or whether you are self-employed -- and the nature of the job. Banks would also check whether you work full-time, part-time, or as a consultant.
If you are working with a widely known organisation, have put in several years of service, and your job stability is visible, then usually, the Personal Loan is offered at an attractive rate of interest. Similarly, when you are a well-qualified self-employed professional, a doctor, lawyer, chartered accountant, consulting engineer, architect, management consultant, etc., and are doing well, you may be offered a lower interest rate on your loan.
3. Credit Score – A credit score reflects your credit behaviour and creditworthiness. Most banks source a copy of your credit score from credit information companies’ viz. CIBIL, Experian, Equifax, Highmark, etc. to understand your existing debt, borrowing behaviour, and how responsible a borrower you are. Remember, the higher the credit score (of 750 and above), the better it is for the applicant, making it possible to get the Personal Loan at the best rate of interest and the least processing time.
4. Debt-to-Income Ratio– Another factor that banks will evaluate is your debt-to-income ratio, i.e. the proportion of your total debt obligation in comparison with your total income. Ideally, the total of all the EMIs you pay should not exceed 40%-50% of your net take-home pay. For example, if your monthly salary is Rs 60,000, and your existing EMIs cost Rs 35,000, it means your debt-to-income ratio is nearly 60%. In such a case, the bank may be hesitant to offer you a Personal Loan, and if it does, you may be charged a higher interest rate.
On the other hand, if your debt-to-income ratio is well under control, you stand a chance of getting the loan at a competitive interest rate. Also, you should try and maintain a fair balance between secured and unsecured loans (since this weighs on your credit score).
[Also Read: How Long Does It Take To Get a Personal Loan Approved?]
5. Your banking relationship
– Other than the above points, your relationship with the bank also plays a role in securing the best possible interest rate on the Personal Loan. If you have been a loyal customer of the bank and the relationship is spread over several years, it may help you get the loan at a lower rate. You may even be offered a pre-approved Personal Loan based on your relationship with the bank.
EMI calculation and repayment:
- The EMI on your Personal Loan will be computed on a reducing balance method. During the initial months of the loan tenure, you pay more towards interest, and gradually, as you repay the loan, a higher portion will be adjusted towards the principal component.
- To repay your Personal Loan EMI on time and add to your creditworthiness, use the NACH (National Automated Clearing House) mandate. Your EMIs will directly get debited from your bank account facilitating automatic repayments.
- If you skip the EMI due to insufficient funds, the loan tenure would (automatically) increase. You may have to bear additional penal interest (of 2% per month on the overdue instalment), and your credit score may drop a bit (by around 50 points).
Axis Bank offers Personal Loan from Rs 50,000 to upwards of Rs 15 lakh with minimal documentation and speedy approval starting at 10.25% per annum. Besides, if you have multiple credit card debts to pay, plus have an existing Personal Loan from another bank on which you are paying a high interest; it makes sense to
consolidate such loans into one Personal Loan from Axis Bank.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.