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Factors that affect interest rates on personal loan

Wednesday, October 17, 2012 by Rajiv Raj

pl105n5Two friends, Amit and Vijay applied for a personal loanof the same amount. They were both in need of Rs two lakh and they had approached the same bank for the credit. After some paperwork the loan was sanctioned to both of them. However, they were in for a surprise when they realized that the rate of interest charged by the bank was different. While Amit was able to clinch the deal at 16%, Vijay had to pay an interest rate of a whopping 20%.

This is because banks charge a different rate of interest depending on a whole host of factors. The interest rate can broadly vary between 14-24%. We take you through three such individual details that can affect the rate of interest charged by the bank.

  •  Credit/CIBIL History-If you have good credit/CIBIL record then banks will definitely award you with a better rate of interest. This means that if you have taken a loan previously and managed to pay it off without defaulting then you will havea high credit/CIBIL score. Apart from the loan the banks also take into account payment of your credit card bill record.
  • Nature of Employment- The nature of your job also plays a crucial role in determining the interest rate. Banks have different checks in place if you are a salaried individual vis-à-vis a self employed person. So if you are working with a reputed organization then banks will be able to extend a cheaper rate of interest. But if you are working with an organization that is not very well known then a higher rate will be charged. In case you have your own business then banks will give you a loan even if you are in an advanced age. On the other hand in case you are a salaried employee then a loan will not be extended if you are nearing the age of retirement.
  • Bank-Customer relationship-If you approach the bank where you already have a bank account and are avalued customer then banks may give you certain leeway. This mean you can negotiate with the bank for a cheaper interest rate. Most banks agree to give a concession of 0.5-1% on the interest rate.

So next time you go around shopping for a personal loan, remember that these three points will affect the amount that the bank sanctions and the interest rate that it is levied. In the next article we will cover more points that affect interest rates on personal loan. So stay tuned!

MadanRajiv Raj

Rajiv is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India’s first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.

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