Personal loans are a fast, effective method of financing your immediate monetary requirements. However, it is vital to consider its interest rates when looking for the best personal loan for you.
After immense research, we have designed this article to equip you with all the things you need to know about personal loan rates before acquiring one.
What Is a Personal Loan Rate?
Before we delve deeper into the fundamentals of personal loan rates, it is essential to understand what exactly a personal loan rate is.
Unlike a secured loan, a personal loan is a type of unsecured loan that aids you in meeting your current financial requirements. In other words, it is a type of loan that doesn’t demand its borrowers collateral or security. It is solely based on an individual’s creditworthiness.
The Personal Loan rate is the interest value that lenders often charge to borrowers as a price for taking a loan.
Furthermore, interest rates on various consumer loans such as personal loans are often quoted as APR, i.e., Annual Percentage rate. Even though people use both terms interchangeably, they do have a slight difference that sets them apart.
A personal loan interest rate is the lender charges on this loan, whereas APR is the yearly cost of the loan. In other words, it is the amalgamation of interest and fees.
Factors That Influence A Personal Loan Rate
Now that we know what personal loan rates are, the next step to success is to understand the various aspects considered when determining a bank’s Personal Loan rate.
This is by far the most critical element that determines your personal loan interest, irrespective of whether you are self-employed or salaried. A rule of thumb to remember is that a higher monthly income in your bank account yields a lower interest rate.
The main reason for this is that banks tend to have more confidence and trust in high-earning applicants as they are less likely to default on their payments due to the steady amount of cash flow in their account.
2. Credit Score
Another critical factor that plays a pivotal role in determining your personal loan rates is your credit score. In its simplest sense, a credit score is a 3-digit value that ranges from 300 to 850. It acts as an indicator for your repayment of bills and money.
To give you a gist of how credit scores work, let us walk through any credit scoring company.
When you enter your details into a reliable credit scoring company, the website uses various mathematical formulas to generate your credit scores.
A lower credit score indicates that you may not be approved for credit, leading you to pay a higher interest rate for your personal loan.
On the contrary, a higher credit score avails individuals to lower interest rates on their personal loans and gives them access to credit products. For instance, an individual with a score above 750 may be eligible for 0% financing on their vehicle of choice.
Furthermore, two primary factors, i.e., payment of bills on time and credit limits, heavily influence credit scores.
3. Payment of Bills on Time
When you ensure to pay your bills on time, credit scores reward your track record, allowing you to entail more benefits. However, a misstep in your credit payments may be costly and can hamper your credit history.
A helpful tip to avoid this in the future would be to plan a structure according to the loan’s repayment term. In its basic sense, the term repayment refers to the tenure of the loan on which a borrower must repay their debt either by going to the bank with cash or checks, or online transactions.
4. Credit Limits
Another factor that is dependent on your credit score is your credit limit. In simpler terms, how much you owe has a significant impact on your overall credit score. A helpful tip is to avoid using more than 30% of your limits. The lower you use, the better it is on your credit score.
5. Employer/Company Reputation
When speaking about the various elements that have a drastic impact on your personal loan rates, it is essential to include the employer’s or company’s reputation on the list.
As personal loans are a type of unsecured loan, lenders often check for different factors to build trust and confidence in borrowers. The reputation of the borrower’s employer or company is one amongst the whole lot.
In brief, lenders often prefer individuals who work for leading companies as they are comparatively more stable financially and tend to have a steady job.
On the contrary, if you work for an organisation that is a start-up or smaller in scale, banks may tend to charge higher interest on your personal loan, as they may not gain that trust they seek.
On the whole, even though the company’s reputation seems like a minor factor, it does have a significant impact on your overall loan.
6. Debt-To-Income Ratio
The DTI or Debt-To-Income ratio is an indicator that depicts the percentage of an individual’s income that he used for payment of debts. It is a significant measure as it influences your credit rating and credit score.
A rule of thumb to remember is that a low debt-to-income ratio shows creditworthiness and repayment capacity. On the contrary, a high debt-to-income ratio is an indicator of financial inability.
Thus, we always recommend you to have a low Debt-to-Income ratio, as it increases your chances of being eligible for loans at the best possible interest rates.
Many people often contemplate the various ways they can reduce their DTI if they have a high value. Below are a few possible ways to reduce your DTI.
Firstly, postpone any type of non-essential purchases. In simpler terms, try spending only on necessary commodities such as groceries, clothes, etc.
In addition, try to look for ways wherein you can increase your current income. Lastly, it is often recommended to avoid taking debts until your ratio is stable and reaches below the 35% margin.
7. Lender Relationship
Another factor that has a significant impact on personal loan rates is your relationship with the loan lender.
By developing a mutual sense of confidence and trust between you and the lender, you are more likely to procure a lower interest rate on your loan. This is because banks tend to reward loyal customers for their actions.
It is important to note that loyalty and trust don’t build overnight. It takes time, and customers are required to be responsible all the time.
Types of Personal Loan Rates
When availing of a personal loan, it is essential to think about the interest rate type. Typically, there are two major types, i.e., fixed and variable. Each type of interest has its own set of advantages and disadvantages that are worth knowing.
1. Fixed Personal Loan Rates
The first type of personal loan rate is the fixed personal loan rate. As the name suggests, these interest rates tend to remain unchanged throughout the loan tenure and are not affected by market changes.
The pros of this particular personal loan rate are that it is safe, as the volatile fluctuations of the market do not impact individuals. Plus, they bring a blessing of certainty, as people don’t have to be anxious about the payment, etc.
Last but not least, fixed personal loan rates yield easier financial planning, as individuals know how much funds they need to allocate every month to repay the loan.
However, like a coin has two faces, fixed personal loan rates also have their own negatives. Firstly, they tend to have a higher interest rate - even though they are not prone to market changes, their interest rates are likely to be high.
Lastly, there is a fear of missing out evoked in individuals. Fixed personal loan rates remain unchanged. So, opting for one may cause you to lose an opportunity to save your interest expenditure.
2. Variable Personal Loan Rates
On the contrary, we have variable personal loan rates. Unlike fixed rates, variable rates vary as per the fluctuations of the market. This, in turn, changes the way one has to make payments.
Some of the pros of these personal loan rates are that they tend to have a lower interest rate than fixed personal loan rates.
Plus, individuals have access to avail benefits and opportunities to save on their overall interest rate expenditure.
However, you must note that the monthly payment amount varies from month to month with variable interest rates. The interest rates may increase drastically in a short time.
On the whole, to pick the right interest rate plan for you, it is essential to think about the factors mentioned above and your budget, needs, and requirements.
How To Get The Best Personal Loan Interest Rate?
Banking a good interest rate on your personal loan is a goal for many individuals. However, many people are often confused with the correct yet easy methods to attain the best interest rate on their loan.
Below are a few tips and tricks you can follow to get the best personal loan rates.
As mentioned above, having a good credit score is a strong indicator of your creditworthiness. Therefore, always try to keep a score of over 700. That will make you seen as a good candidate for a personal loan in the eyes of banks.
Another tip to get yourself the best personal loan rate is to compare lenders and get the best offer. Try researching before making the final decision.
Lastly, keep an eye out for seasonal offers. Lenders and other financial institutions often notify their customers about the various offers through email or message. As a consumer, you need to be careful about these offers and find one that works for you.
Current Personal Loan Rates
In today’s fast-paced world, personal loan interest rates tend to range between 3% and 36%, depending upon an individual’s credit score. A rule of thumb to follow is that a high credit score indicates a lower interest rate on your loan.
Based on credit ratings, interest rates vary between different bandwidths i.e they can either be excellent, good, average, or bad. Each bandwidth has its own criteria that are worth knowing.
1. Excellent Credit
Lenders, with these types of credit, often gear them towards borrowers with an excellent credit history. Those who qualify tend to have a credit score between 720 and 850.
With such a high amount, they can avail many perks. Some of these benefits include an APR as low as 10.3%. In fact, a bank can go even lower.
The main advantage of this is that individuals can search for lenders with lower fees and advertised interest rates.
2. Good Credit
The next bandwidth is good credit. These types of loans tend to offer their borrowers relatively competitive interest and low fees. If you have a score anywhere between 690 and 719, you fall under this bandwidth.
Furthermore, individuals with such a credit score tend to qualify for a minimum APR of 13.5%.
3. Fair Credit
The term fair credit resonates closely with an average credit score. If you have a score ranging between 630 and 689, you may find it difficult to apply for a personal loan that offers reasonable fees and interest rates.
Plus, you may qualify for this loan with an APR of 17.8%, which is a good opportunity to help you get started.
4. Bad Credit
Last but not the least, you can even qualify for a loan with a credit score between 300 and 629. In this category, the best interest you can get is approximately 28.5% or 30%.
If you are looking for an effective solution to avail the best personal loan for you, then Lendela is the best choice for you. Offering immense research and lower rates for loyal customers, Lendela is the one-stop solution for you.
With Lendela, individuals can compare and contrast an array of personal loans customised based on their loan amount, repayment methods i.e check, bank, or online, fees, interest rate, and other important factors that are required to apply for a personal loan.
Personal Loan Rates in Singapore: Credit score and income
From the above discussion, it is evident that an array of factors such as credit score, DTI ratio, income, and credit limits influence the personal loan rates. Therefore, to avail yourself of the best interest rate for you, you need to think about these factors carefully.