People who want to borrow money are always interested in personal loan interest rates. A borrower can get loans with a range of 4 percent to 35 percent. Here are some factors that affect your interest rate.
Credit Score
This score defines a borrower’s creditworthiness, and it ranges from 300 to 800. The higher the credit score is, the lower your interest rate will be. A high credit score tells the lender that lending money to the borrower will be a less-risky decision as he tends to make a debt payment on time. On the flip side, a lower credit score makes deals riskier for the lender. Therefore he tries to circumvent risk with a high-interest rate loan.
Debt-to-Income Ratio
This ratio defines your ability to pay back the loan. For example, if you earn $5000 while your debt is $2000, your debt-to-income ratio is 40 percent. For getting a better interest rate, this ratio should be lower than 40 percent. This requirement is an important one, and it is highly likely that apart from your credit score, it is the second thing that a lender would check when evaluating your loan application.
Employment History
The lender will look at your 24 months of employment history. A fresher on a job will find it hard to get a personal loan. You can expect a lower interest rate when you have been working on the same job for more than three years; it’s all about stable income and employment. When you are new at a job, the lender will feel it is riskier to extend a loan to you. Most lenders will charge a higher interest rate if you have fresh employment with no prior working records.
Income
Low-income people will have to get a personal loan at a high-interest rate and vice versa. Your income shows your ability to repay the loan amount. High income drops down loan risks. Therefore lenders are ready to offer a personal loan at a low-interest rate.
Loan Term
A borrower can reduce his interest rate for getting a loan for the short term as long term loans usually have a high-interest rate. You can look for lenders who will offer you lower interest rates when you are willing to settle the repayments in three to six months.
Loan Amount
Personal loan interest rates are usually unsecured loans. When a borrower borrows more money, it increases lender risks. Thus he charges more interest rates. You can go with a low personal loan interest rate by adding collateral to this deal.
You can always work with a loan broker who works on commission and can guide you on how to get loans at lower interest rates.
