How to lower the interest rate on a personal loan is a common question you encounter as a borrower. The most practical choice to take care of the majority of your urgent financial needs is a Personal Loan with a low interest rate. You can use a personal loan to meet your demands, whether they are for a well-deserved holiday, house renovations, or the wedding of your kid.
There are no usage restrictions on the borrowed amount, as long as you borrowed it for a responsible and legal cause. However, paying back these loans might be unpleasant for your finances if the interest rates are high. Some strategies can significantly lower your Personal Loan interest rate and the money you would have to repay.
What are Personal Loans?
A Personal Loan is money borrowed at a specific interest rate and repaid over a set period. Personal Loans are unsecured, so you don’t have to pledge any security or collateral. You might utilise the loan amount to finance your immediate needs, whatever they might be. As a result, taking a Personal Loan is an excellent choice for all your financial demands.
A Personal Loan is probably one of the most significant liabilities; you must adjust your finances to be able to return it on time and without making a lump-sum payment. As a result, if you need a loan, aim b to secure one with the lowest Personal Loan interest rate possible.
Simple Ways to Reduce Your Personal Loan Interest Rate
Before you are approved for a Personal Loan, the following are some of the factors that the lender considers:
- The loan amount you’ve requested
- Your repayment capacity
- The firm you work for
- Your employment credibility
- Depending on this assessment, the lender offers you a Personal Loan at a pre-defined interest rate and service terms.
Here are a few strategies on how to reduce the interest rate on a Personal Loan:
A Good Credit Score
Paying your debts and obligations on time improves your credit score. A credit score of 750 or higher increases your chances of getting a Personal Loan with a low-interest rate. A few strategies to do this are:
Maintain a healthy credit combination of both secured and unsecured loans
- Monitor your credit report regularly
- Avoid any direct loan or credit card applications
- Keep a credit utilisation ratio of less than 30%
- Ensure timely repayment on your guaranteed or co-signed loan account to preserve the credibility of the co-signer/guarantor and the primary borrower’s credit scores.
- Repaying Your Debts on Time
- Pay your credit card account in full and pay off your monthly debts. You should also pay back the other loans you have on time. It would help you obtain better deals on your future loans. If you have a strong EMI payback history, you will have a greater chance of negotiating lower Personal Loan interest rates and terms with the lender.
- Your Work Experience
Before granting the loan, the lender will want you to have the following:
A solid DTI (Debt to Income Ratio)
Job and housing stability
A two-year employment history, including one year with your present employer
These contribute to settling a good credit score and influencing your Personal Loan interest rates.
Applicants employed by the state or central government, PSUs, or quasi-government organisations get exemptions from lending institutions for loans. Your reputation and financial stability also influence the loan interest rates.
Employee Credibility
As mentioned above, applicants employed by the state or central government, PSUs, or quasi-government organisations are favored by lending institutions for disbursing loans. Employees who work for reputable/blue-chip companies, international corporations, and such may also be able to negotiate better terms. Lenders expect the borrower to have a constant income, a credible job, and, therefore, a way to ensure that they will repay the loan on time.
Relationship with the Lender
If you have a solid relationship with the lender, you may be able to have a Personal Loan with a low-interest rate and on better service terms. The lender is aware of your good credit behaviour. There is lesser risk involved than if you were a new customer.
Examine the Process for Calculating Interest
You may pay more interest after the loan term despite the lender offering you a cheaper interest rate. It is because calculating the total interest to be paid varies between lenders. This interest rate provided on a loan could have a fixed or floating interest rate. A fixed rate implies a fixed lending rate for your loan term, whereas a floating interest rate is subject to quarterly revision. The fixed interest rate is usually 1 to 2% higher than the current floating interest rate.
However, while the fixed interest rate remains constant throughout the repayment tenure, the floating interest rate keeps fluctuating depending upon the benchmark rates by NBFC.
Keep an Eye Out for Special Deals During the Year
During holidays and festive periods, lenders tend to offer plans with lower Personal Loan interest rates. It can be advantageous to take out a loan at such a time.
Conclusion
While these may appear to be basic suggestions and practices at first, they can go a long way toward receiving a Personal Loan with a low-interest rate while reducing your overall debt burden and financial concerns in the long run.
Some Frequently Asked Questions
1.How much down payment should I make to reduce my loan EMI?
The initial amount paid by the borrower while applying for a loan is termed as a down payment. There is no specific rule for how much down payment a borrower can make for reducing loan EMI. However, it is advisable that you should make at least a 20-30% down payment for any type of loan. It will help you to get a lower EMI on the remaining loan amount. Also, reducing the interest rate on a Personal Loan is another factor that can be considered by the lender when you make a heavy down payment amount.
2.What are the factors that determine the EMI of a loan?
While opting for Personal Loan, we always wonder how to reduce my Personal Loan interest. Three major factors directly impact the loan including loan amount, interest rate, tenure of the loan, prepayment, and down payment. These factors will also help you reduce the interest rate on a Personal Loan.
3.Which kind of interest rate gives a lower EMI – the floating rate of interest or the fixed rate of interest?
The floating rate of interest depends upon the market scenario and the fixed rate of interest is pre-determined by the lender. The floating rate of interest is considered relatively cheaper. However, you should choose which loans have the lowest interest rate by making a detailed comparison online.
