In case of a financial emergency, a personal loan can help you get the credit in much less turnaround time. Since it is an unsecured credit facility, you do not need to collateralise your property which can lead you to undergo lengthy application procedures. However, being an unsecured and therefore relatively risky credit option, lending institutions generally charge a higher interest rate on personal loans. There are certain ways that can assist you in securing credit at a relatively lower rate of interest.
Things to Ensure for Securing a Low Interest on a Personal Loan
A low personal loan interest rate can help borrowers reduce their total outgoing interest or the overall borrowing cost. Resultantly, it becomes much easier to repay a loan.
If you are intending to borrow a personal loan sooner or later, you can follow the below-mentioned advice to secure it at a reduced interest rate:
- Compare Interest Rate Across Lenders
Before applying for a personal loan, you need to perform a thorough research to know the prevailing interest rate across the lending market. In this process, you can also identify the particular financial institution which offers a lucrative lending rate. You also need to ensure that you have met the eligibility criteria of that lender. Otherwise, the lending institution can reject your loan application or can set a higher rate of interest to compensate for its risk.
- Check for the Availability of Special Offers
Some lending institutions also offer discounts on their regular personal loan interest rate on some special occasions, such as New Year, Diwali, Independence Day, etc. If you require collateral-free credit at special interest, you need to check which financial institutions offer these festive loan offers. To do this, however, you will have to apply for the loan during those festive periods only.
- Maintain a Healthy Relationship with Lender
Maintaining a healthy relationship with the lending institution is also important to get a lower interest rate on the personal loan. A healthy relationship mainly refers to the timely repayment of existing or previous loans. This builds trust that you will repay your future debts as well with full responsibility. Being a trusted borrower, you can also request your lending partner to determine a reduced interest rate for you.
- Take Floating Interest Personal Loan
You can get a loan with two different types of interest rates. One of these is the fixed-rate personal loan in which the applicable interest rate remains unchanged throughout the tenure. The other one is a floating rate personal loan in which the applicable interest rate keeps changing. This change follows the base rate of that lending institution.
Usually, floating-rate loans come with significantly lower interest rates compared to its counterpart. You can save large amounts on your interest outgo. However, like the reward, it also comes with a risk. In case of a large increase in the base rate, you may have to end up paying a higher interest.
- Build and Maintain a High Credit Score
One of the first few things that a lending institution checks while determining the interest rate on a personal loan is the credit score. Individuals who get a higher credit score are deemed to be more creditworthy compared to those with a lower credit score. Generally, to get a personal loan, lending institutions ensure that you have a minimum CIBIL score of 750. You need to maintain a CIBIL score higher than this to negotiate with the lender for a reduced interest rate.
Some lenders like IIFL Finance come with a lenient credit score requirement. With a minimum CIBIL score of only 700, you can secure IIFL personal loan at the market-best interest rate.
- Meet the Eligibility Criteria
In a personal loan, borrowers do not need to keep their properties with the financial institution as a security. Therefore, this unsecured credit is a high-risk product for the lender. To reduce its risk factors, it sets the eligibility criteria for the personal loan.
You need to meet every parameter of eligibility standards properly to ensure that you are a creditworthy and deserving loan applicant. It also assures your lender that you can repay your credit on time without defaulting a single EMI. This is why your lender can agree to offer you a lower interest rate on the personal loan after your request.
The documents you submit while applying for the personal loan help lending institutions validate whether you have met all the eligibility standards properly. In this regard, you should also know which documents you need to keep handy during your loan application process so that you can eliminate last-minute hassles.
Documents Required for Personal Loan
Following are some major documents that you need to produce while applying for a personal loan:
- Identity Proof: Voter ID card, driving licence, passport, Aadhaar card, etc.
- Residential Proof: Utility bills, Aadhaar card, driving licence, passport, etc.
- Income Proof: Salary slip, bank account statement for the last 6 months
Things to Consider While Applying for a Personal Loan
Besides the interest rate, you also should keep in mind certain other aspects as mentioned below to make informed decisions about your loan:
- Check the Charges: Apart from the interest rate of the personal loan, several charges, such as the processing fees, stamp duty, documentation charges, etc., also increase the overall borrowing cost. Therefore, it is necessary that you check all these charges before applying for credit from a financial institution.
- Determine the Loan Amount: You also need to measure the total amount you will require to meet your credit shortages. For this, you need to list down all the incoming expenses and calculate the total amount. After deducting the amount that you can finance yourself from your savings, you will understand how much you will need to borrow. You can avoid taking another loan in the future by making this calculation.
- Know the Suitable Tenure: In a personal loan, you generally get to choose a repayment period between 1 and 5 years. You should choose a tenure in which the EMI amount is within your repayment potential. This will help you pay your EMIs without any difficulties.
Meeting the eligibility criteria is a must to secure an attractive interest rate on a personal loan since it is an unsecured credit facility. This is because it helps lenders get an assurance that you have repayment potential. Besides, you also need to do your own research to find the lending institution that extends relatively lower interest rates.