Imagine two individuals applying for a personal loan of ₹5 lakhs for the same tenure. One is offered an interest rate of 11.25% while the other gets quoted at 13.75%. The question that naturally arises is: Why the difference?
This is because lenders don’t apply a standard approach. Instead, they assess each applicant individually by looking at several criteria to calculate risk and repayment potential. Let’s break down exactly how that works and more importantly, what you can do about it.
Unlike certain home loan schemes that may be tied to repo-linked rates, personal loans are unsecured which means there’s no collateral backing them. This puts more risk on the lender’s side. To manage that, banks assess several factors to understand how reliable you are as a borrower and that directly affects the interest rate they offer you.
- Credit score
This is often the starting point. A high credit score that is 750 or above—signals good credit behaviour. If you’ve been paying your EMIs and credit card bills on time, maintaining a healthy credit mix and not utilising too much of your credit limit then you’ll likely score well here.
But someone with a slightly lower score say in the 650–700 range, might still get approved but at a higher interest rate. From the lender’s perspective, a lower score increases the chances of repayment delays or defaults even if marginally.
- Your monthly income and its stability
Salaried employees working with well established private or government organisations are often considered more financially stable. In comparison to someone who’s self employed in a less consistent or seasonal business may be seen as a higher credit concern.
Additionally, your net take home salary after deducting EMIs, rent and other fixed expenses play a role. If a significant portion of your income is already tied up in financial obligations then it could lead to a higher rate or even rejection.
So ensure your fixed obligations do not exceed 40–50% of your monthly income before applying for a new personal loan.
- Employment profile and industry risk
Lenders also look at where you work and the nature of your employment. Certain industries such as IT, BFSI or government are perceived as more stable while startups or volatile sectors might carry more uncertainty. Two borrowers with the same income might get different interest rates if one works for a government organisation while the other is with a high risk startup. Hence, it is important to understand how your job profile impacts your loan terms.
- Loan tenure and amount requested
The duration you choose can affect your interest rate too. Shorter tenures often attract slightly lower rates as the lender’s exposure is for a smaller duration. Similarly, the loan amount and your repayment capacity influence the rate.
Choose a loan amount and tenure that comfortably fits your repayment capacity. Avoid stretching your budget too thin.
- Your existing relationship with the bank
Some banks extend preferential rates to existing customers who have a clean transaction history, regular salary credits or maintain high account balances. These subtle aspects of your banking relationship can make a significant difference in the rate you’re offered. Even if you get multiple pre-approved loan offers make sure to compare them. Sometimes, going with your existing bank may offer better terms than switching to a new one.
- Market conditions and internal lending policies
Banks often revise personal loan interest rates based on market conditions, inflation trends or changes in internal policies. This is why it is important to keep an eye on lending trends and apply when rates are relatively stable. You can use a personal loan EMI calculator to understand how small changes in rate impact your monthly outgo.
While it’s disheartening to get a higher interest rate, remember that you can control several factors. Your credit score, repayment history, financial discipline and how you plan your loans can all make a big difference. So, try to focus on preparing your financial profile to be as appealing to lenders as possible. Because when it comes to personal loans then a few smart moves can translate into long term savings.