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Personal Loan
Why some lenders offer lower personal loan interest rates in India
Key Takeaways
A low personal loan interest rate is decided based on your financial profile and credit score.
- The lender’s internal cost, risk appetite, and growth strategies also influence what interest rate is offered.
- Banks, NBFCs, and FinTechs price loans differently, and they may offer promotional or standard rates based on their policies.
- You can plan ahead to manage your credit well and improve your profile to get a low personal loan interest rate.
As you navigate the world of personal loans and compare lender offers, you will notice the difference in interest rates advertised. Some may offer low-interest personal loans, while others are comparatively higher.
The reason this difference exists is because of the highly competitive lending sector. Due to the convenience and popularity of personal loans, more loan providers, including banks, NBFCs, fintech platforms, etc., have entered the space.
They need to keep up with the demand and stand out, which makes them competitive. Hence, they try to grab your attention with a low personal loan interest rate. However, what you eventually get may differ. Read on to learn how that works.
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How do lenders decide on a personal loan interest rate based on your profile?
The advertised low interest personal loans only apply if your profile qualifies. Lenders conduct multiple internal checks to decide if you can avail of the low personal loan interest rate. They determine based on your eligibility.
Here are some of the crucial factors considered to determine the final personal loan interest rate:
Your age
When you’re in your prime working years, you typically have predictable earnings thanks to a steady career or the capacity to build a sustainable business. Hence, the lenders have a lower perceived risk. This comfort may reflect in pricing.
Credit profile
Lenders also look for a high credit score. It gives them an understanding of your past repayment behaviour. It also reveals your credit history, your management of credit mix, credit utilisation, and more. So, having a favourable credit score of more than 750+ works in your favour in getting a personal loan with a low interest rate. A lower score, on the other hand, may not attract a good interest rate.
You can apply for a FIRSTmoney personal loan with a CIBIL score of 710 and above.
Existing EMI burden
Despite a decent income, if your active EMIs are excessive, they can affect your eligibility. Lenders closely assess how much of your monthly income is already committed. If you have higher obligations, your capacity to handle another loan is compromised. Hence, your loan application suffers. A lower EMI-to-income ratio works better and increases your chances of getting a low personal loan interest rate.
Income and employment
A high income is great, but so is the regularity. So, whether you are applying as a salaried professional or a self-employed, lenders look for income stability through your salary slips or business income proof. They also check the years you’ve been employed or are running the business, and the credibility of the same.
Relationship history with the lender
If you already have a bank account, credit card, fixed deposit, or a past loan with the same bank or financial institution, you may have an edge. The loan provider already has crucial details to understand your financial habits and standing. This works in your favour for negotiating a low interest personal loan.
Internal risk grades
Beyond your credit score, lenders assign internal risk grades based on your repayment behaviour patterns. They also consider your income trends and past interactions. Such categorisation based on risk level helps them set a differential personal loan interest rate for different borrowers.
Banks such as IDFC FIRST Bank’s FIRSTmoney assess your age, income and credit profile during the loan application. High income, low debt-to-income ratio, and high credit score, makes you a low risk profile, enabling you to draw a suitable Loan offer.
Cost of funds: The hidden reason behind personal loans with low interest rates
Even when two loan providers assess your profile the same way, their final pricing can end up looking different. This is because a big part of deciding on a personal loan interest rate is also lender specific. They focus on the cost of funds. Here’s how this works:
Banks often price loans lower than NBFCs
Banks typically have access to low-cost funds thanks to savings accounts, current accounts, and term deposits. Since they pay relatively modest interest on these deposits, they can lend at a lower personal loan interest rate without squeezing margins.
Repo rate influencing borrowing costs
Changes in the RBI’s repo rate directly affect how expensive it is for lenders to borrow. Institutions that can quickly pass on rate cuts are the first to offer a low personal loan interest rate. Others may lag due to longer borrowing cycles.
FinTechs start with ultra-low rates
FinTech lenders are trying to grow and compete against giants in the finance industry. Hence, they may subsidise the interest rates in the early stages to build a customer base. These are usually introductory offers.
Scale of lending
As large lenders move money at a huge scale, disbursing thousands of personal loans regularly means the capability to operate at lower margins. Hence, the volume advantage allows them to offer personal loans with low interest rates.
Promotional interest rates vs standard rates: What’s the difference?
The eye-catching low-interest personal loan offers you see are often promotional. Sometimes, lenders keep it low as a standard rate. Both are genuine and very much possible to lock in, but they work differently. Understand the difference to react more effectively to such offers.
Promotional rates are time-sensitive
These rates are usually rolled out during festive seasons, new product launches, or in a bid for aggressive growth marketing. They are time-sensitive and limited to a select profile. You can cash in on them in short time windows.
Standard rates reflect long-term pricing
Standard personal loan interest rates are based on the fundamental principles. Lenders factor in the funding cost, their risk appetite, and internal policies for deciding the interest rate. If your profile qualifies, you can secure a decent interest rate within the standard range.
Eligibility filters matter regardless
Promotional offers often come with certain clauses in regard to the minimum credit score or income expected. That’s why not everyone qualifies, and it is common to receive a higher quote than what is advertised.
Your tenure and loan selection change the final rate
Some promotions apply only to shorter tenures or higher ticket sizes. Opting for flexibility or longer repayment can put you out of the qualifier. You can then apply for a personal loan under the standard rate bracket.
Pre-approved promotional offers
Based on your existing relationship with the lender, you may also receive pre-approved personal loan offers in your mailbox. Keep an eye out for those and opt in when you genuinely need funds.
How lenders curate personal loan interest rate offers?
The final personal loan interest rate is decided based on several layers of internal checks. Lenders combine market conditions, borrower credibility, their risk assessment, and business goals in determining the interest rate.
Here’s how the curation of personal loan interest rates goes:
Segmenting borrowers into clear risk buckets
Lenders group borrowers based on risk, which is evaluated using credit history and income stability. Those falling into lower-risk segments are more likely to receive a low personal loan interest rate than others.
Prediction of future repayment behaviour
Modern lenders rely heavily on data analytics. They notice your spending patterns, account activity, repayment timelines, and past pre-closures to predict your borrowing behaviour in the future. When confidence is established, they feel more comfortable in extending low-interest personal loans.
Customising rates based on loan structure
The tenure and loan amount you select have a great influence on the personal loan interest rate. Shorter tenures lead to higher costs initially but reduce the overall interest rate because the lender’s exposure reduces faster. But with a longer tenure, you stay indebted for longer. Hence, even with the low EMI, the interest outgo increases.
Leveraging partnerships and frameworks
Lenders tied to other digital platforms often curate special rates for users because of the increased bandwidth to manage risk. They reward you with a better personal loan interest rate as a point of attraction during the partnership campaigns.
Influence of geography and employment
You can expect different interest rates based on your background. When you apply from stable employment sectors and cities with a good credit score, you get offered a personal loan with a low interest rate. Thus, such data also has an influence on the interest rate.
With FIRSTmoney, you can get an instant personal loan up to ₹15 lakhs and at a competitive interest rate of 9.99%. You also enjoy other benefits like on-demand loans and zero-foreclosure charge.
Tips to position yourself for a low personal loan interest rate
Now that you know how a personal loan with a low interest rate is decided, it’s a question of how you qualify for it.
Here are some of the practical tips you can follow:
Strengthen your credit profile
Make it a point to check your credit score before you apply for a personal loan. A healthy credit score is the strongest signal for lenders to assign a low personal loan interest rate. If it falls below 700, clear outstanding EMIs, keep your credit utilisation low, avoid unnecessary new credit applications, etc., to boost your score.
Reduce your existing EMIs
If a large portion of your income is already occupied with EMIs along with your monthly expenses, lenders don’t take the tighter cash flow well. They would want you to have a comfortable room to accommodate the new loan. So, clear off as much as possible before you apply.
Keep your income stable and consistent
Stable income matters because it enhances your financial capacity to take on a personal loan. So, ensure you can prove regular income credits with salary slips, business audit reports, clear bank statements, ITR, or other accepted income proofs.
Build and use relationships smartly
As discussed, having an existing relationship through a bank or loan account with a bank or financial institution can put you in a favourable position for negotiation. As you are a familiar candidate, you can build a case for a loan with a low interest rate.
Look for pre-approved offers
Pre-approved loans are usually backed by internal data and prior behaviour. It is yet another perk of an existing relationship with a bank or financial institution. Since the lender already trusts your profile, you require minimal case building to secure a low personal loan interest rate.
Choose loan amount and tenure carefully
Borrowing more than you need or stretching your tenure unnecessarily can push your rate higher. Instead, ask for a reasonable loan amount with a tenure that focuses on comfort as well as reduced interest outgo.
Check eligibility before you apply
Applying with several lenders in a short span lead to multiple credit enquiries. It hurts your credit score temporarily and affects the accurate assessment of your credit history. Thus, carefully compare offers and apply selectively to protect your chances of getting a low interest personal loan. You can use the personal loan eligibility calculator offered by IDFC FIRST Bank.
Time your application well
Festive seasons or special campaigns can work in your favour. In a bid to secure more customers, lenders may have specialised offers on the personal loan interest rate. They may also reduce upfront costs. You can cash in on them when your application is timed well.
Opt for digital lenders
Many loan providers offer slightly better personal loan interest rate terms for fully digitised applications. The reason is not-so-rigid eligibility requirements coupled with minimal documentation. And most of the digital lenders are FinTech platforms trying to find their footing in the competitive industry.
Lenders like IDFC FIRT Bank also offer disbursement within 10 minutes wih their FIRSTmoney personal loan owing to a strong digital presence.
Keep credit utilisation low
Before you apply for a personal loan, limit your existing credit. Lower credit card usage or reliance on loans. Only apply for a personal loan you genuinely need and can afford to repay comfortably. This shows your seriousness and reflects positively on your profile.
Final words
A low personal loan interest rate is an outcome of how lenders assess risk, manage their own costs, and understand your repayment behaviour and potential. While market competition may create attractive offers, what you finally receive depends on how well your profile aligns with the lender’s expectations. You want to understand all the possibilities to lower the personal loan interest rate and prepare in advance. Borrow with clarity to secure the best rates.
Explore FIRSTmoney personal loan by IDFC FIRST Bank to benefit from quick disbursal in 10 minutes, no paperwork, and zero foreclosure charges.
Frequently Asked Questions
Are loans with very low interest rates always the cheapest option?
Not necessarily. A low interest rate may come with higher processing fees or other charges. It is critical to get an idea of the overall loan cost to understand if it is the cheapest instead of just the interest rate.
Do personal loan interest rates differ for salaried and self-employed borrowers?
They can. Salaried applicants with stable employment are often perceived as lower risk, which helps them get low-interest personal loans. That said, self-employed borrowers also stand a strong chance with good financial records and credit score.
Will closing a loan early help me get a lower rate next time?
With timely repayments and clean closures, your credit score receives a boost. This can help you get a lower interest rate on the next loan.
Disclaimer
The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank 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 mentioned. Please consult your financial advisor before making any financial decision.
The features, benefits and offers mentioned in the article are applicable as on the day of publication of this blog and is subject to change without notice. The contents herein are also subject to other product specific terms and conditions and any third party terms and conditions, as applicable. Please refer our website www.idfcfirst.bank.in for latest updates.
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