In today’s generation having a personal loan is a common thing because of various reasons such as quick approval, less risk, installment payment, zero collateral and timely payment schedule. Personal loans can be used for any kind of personal expenses and the lender does not question the usage of funds.
The interest rates are one of the key factors which is very important to consider when opting for a loan. Different banks offer different loans and they charge different interest rates depending on the borrower’s banking relationship. You can compare interest rates from bank to bank and you will see there is variation in interest rates. Interest rates depend on certain factors and banks set these factors in issuing the loans.
When you are trying to take a personal loan you should consider these below factors which will affect the personal loan interest rate.
- Salary/source of income
- Listed Company/Non Listed Company
- Credit Score
- Designation and age
- Banking relationship
- Negotiating Skills
- Salary/source of income
Salary is the first criteria that a lender will look into before issuing a loan. The higher the salary the higher is the loan amount and higher are the negotiating chances. The borrower can negotiate with the lender on reducing the interest rate and increasing the loan amount if the salary is higher in number.
The bank will get a higher security of repayment of loan. As the repayment chances are more for high salaried borrowers the bank will issue loans accordingly.
The bank will check the repayment ability of the borrower, the more income of the borrower the more chances of getting quick loans approved by the lender. A source of trust is generated with high income borrowers as there are very less chances of default.
- Listed Company/Non Listed Company
Based on the Companies financial insights the companies are rated and they categorised under listed companies and non listed companies. If a company is listed then the chances of loan approval is very high and vice versa.
Banks in the UAE offer loans to both the Listed Companies and the Non listed Companies. The chances of quick loan approval, higher loan amount, reduced interest rates are the added advantages of the listed companies. If an employee is selected and started working in a listed company then it is an added advantage of getting loans with good features.
Lenders are attracted towards employees from the listed companies and they issue loans quickly to them. On the other hand if a company is a start up or non listed company then the loans will be issued but with higher interest rates, reduced loan terms compared to listed companies, thorough background checks and additional verification of the borrower’s profile.
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- Credit score
Credit score is another deciding factor which affects personal loan interest rates. Credit score is a number which defines the borrower’s creditworthiness. Prior to issuing a loan banks will check the credit score. If the borrower has a good credit score then a loan will be issued as per the terms and conditions. If the borrower is not having a good credit score then the loan will be rejected or issued with a higher interest rate.
This check is done to validate the payment behaviour of the borrower. For every payment that borrower makes credit score points are added. If any payment is missed then it will take a hit on the credit score and the number of points dropped will affect the borrowing ability. The higher the credit score, the higher is the loan amount, the higher is the chance of reducing the interest rates.
- Designation and age
The designation of the employee plays an important role. If a young borrower has a good designation in the listed company such as a manager or senior manager then the loan amount will be higher and also the interest rates will be lower. On the other hand if the employee is very senior and opting for a personal loan during the time of retirement then the interest rate will be higher. Designation of the employee along with the age play a deciding factor on the personal loan interest rate.
- Banking relationship
Banking relationships have an influence on deciding the interest rate. A customer who is loyal to the bank having a good loan repayment history and longevity in banking relationships has a higher chance of getting an attractive rate of interest.
If the borrower already has a salary account in the bank and is applying for a loan then the bank will provide a competitive interest rate. Some banks offer preapproved personal loans with attractive rates of interest. Maintaining a good banking relationship will provide an advantage of reduced interest rates.
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- Negotiating Skills
If you have a good bargaining power of convincing and negotiating then banks may consider reducing the interest rate. However there are certain notable points you should be having a good credit score, banking relationships, good loan repayment history. Only having negotiating skills will not help in bargaining for interest rates. Once you have all these then banks will consider your request and provide you with good competitive interest rates.
Take away
A personal loan is a collateral free loan issued to the borrower. If you focus on these factors and have a good control on all the points mentioned above you can get a good deal in personal loan. Different lending institutions have different rates of interest but these are the main factors which will finalise the loan deal.
About the author
Vinay Kumar Goguru is a finance professional with more than 8 years of diverse experience as a researcher, instructor and Industry work experience with both public and private entities. Prior to MyMoneySouq, he spent 6 years in Berkadia, It's a commercial mortgage banking company. He has a "Doctoral Degree in Commerce" and two master's degrees with a specialization in Finance, one as Master of Commerce and other as Master of Business Administration. He has written several articles on personal finance, published by different International journals. He loves traveling, reading and writing is his passion. He has a dream of writing a book on his favorite finance topics.
