Personal loan is one of the most sought after loans for fulfilling various financial needs. Most of the financial institutions provide these loans easily. These are generally payday loans that need to be paid back at the next pay day. As these are mostly unsecured, they come with a high interest rate. With increasing demand for personal loans, the interest rates are also increasing at an alarming rate making it a cause of concern for the borrowers. 

Now, the main concern is the interest rate. Read further to know more about interest rates when taking out a personal loan?

Personal loan interest rates

All loans come with an interest rate. It is generally a certain percentage of the principal amount that one needs to pay back along with the amount borrowed. A higher interest rate makes the loan more expensive while a low interest rate makes it affordable. So, it is necessary to check out the interest rate at which the financial institution is offering personal loan.

Essentials to know when looking for loans

There are several things that need your attention when getting a personal loan. The major one is the interest rate which depends on several factors. The major ones are inflation rate and economy. The credit score and other personal factors can also have a huge impact on the personal loan interest rate.

Apart from the interest rate, many financial institutions ask for processing charges or there are other hidden costs. You can understand the charges by knowing the APR, Annual Percentage Rate. If there are no additional charges, the APR will be same as the rate of interest. It will be high if there are additional charges. So, make sure to check every tiny detail to ensure that you get the best interest rates on a personal loan and with no hidden charges.

Those who are financial emergency can look for other options as they are offered loans with high APRs. Some of these options include pay advance and bank overdraft.

Why you should understand the interest rates?

Many people overlook the interest rates when they are in need of finances urgently. They accept the terms and interest rates offered just to fulfill their need at the moment but interest rates can significantly impact the repayment amount. A higher interest rate on a long term loan means you will have to pay a huge amount other than the principal amount over the term of loan. 

So, it is better to explore the options and look for competitive interest rates to be on the safer side.

Essentials to qualify for personal loan

Getting personal loan is quick and easy. However, all lenders have certain criteria for offering loan. These factors also determine the interest rates at which the loan will be provided. So, having an understanding of these criteria will help the borrowers in getting the loan at competitive interest rates. The borrowers also need to know that if they are at a higher risk, they might get high interest rates and sometimes they might also be denied the loan they are looking for. The things that make you an ideal candidate for the loan are discussed as follows:

Credit History:

Credit history and credit score are two important things that a lender looks for in an applicant. A good financial history is the key to a good credit score. A good credit score ensures that the applicant is at low risk and if the loan is granted, it will be paid back in time. So, maintaining a good credit score is the key to obtain a personal loan at low interest rates.

Income:

When you apply for a loan, the lender will check your income as well the expenses. This will let the lenders know the amount you save and whether you will be able to pay back the loan in time. They might ask you to submit the income proof to make the necessary evaluations.

Collateral:

Most personal loans are unsecured loans but if you offer collateral against the loan, the financial institution will consider you less risky and there are high chances of getting the loan approved at low interest rates. 

Debt to income ratio:

The banking institutions also check the debts on the borrower to ensure whether the borrower will be able to pay back the loan. If the debt is higher than the income then the loan application will be rejected.

Tips to improve the credit score

A poor credit score can be the reason behind higher interest rate or rejection of the loan application. To prevent any such thing, you should pay attention to maintaining your credit score. An ideal score ranges between 670-799. If the score is below 580, it is considered poor. To maintain a good credit score, it is essential that you keep track of your credit card bill payments, review the credit reports every now and then and consolidate your debts. In this way, you can maintain a good credit score.

If the credit score is in the required limit or exceptional (800-850), the banks are likely to provide a personal loan at favorable rates. 

So, overall maintaining a good credit history and score is the key to obtaining personal loan at lower interest rates irrespective of the loan term. Other factors that can have an impact are your income and debt to income ratio.

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