How to Reduce Personal Loan Interest Rates?

Personal loans have become quite popular in India as it helps manage a wide range of needs, ranging from planned purchases to major commitments. Moreover, these loans are unsecured, so there is no need for any security to get a loan. But you have to pay these loans at applicable personal loan interest rates through EMIs.

Interest rates are the major element that determines the overall borrowing cost in these loans. However, there are ways to reduce this interest rate and keep the monthly EMI affordable. In this blog, you will learn smart ways to reduce personal loan interest rates.

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How Interest works in Personal Loans?

When you take a personal loan, you have to repay it along with the interest. Interest is the cost you have to bear to borrow money. It is calculated as a percentage of the amount you have borrowed and is added back to your monthly EMIs. If the interest rate is high, then you will have to pay a much higher amount than what you have borrowed. This is the reason why a lower interest rate matters so much.

What Determines Your Interest Burden?

Lenders take into consideration certain factors before deciding on your interest rate. Here are the key elements: –

• Your credit score and repayment history.
• Current income and debt-to-income ratio.
• Employment Stability.
• Loan Tenure & amount
• Relationship with lender

Lenders prefer to give low interest rates to those borrowers who have strong credit histories and low financial risk. But there is no need to worry. Even if your credit profile is not so strong, there are certain ways through which you can reduce your personal loan interest rates.

Smart Ways to Reduce Personal Loan Interest Rates

Here are some tips that can help you reduce the interest rate of your personal loan: –

1.   Compare Various Lenders

Don’t go for the first loan offer you get. The loan market is very competitive, and there are various banks, NBFCs and fintech companies offering personal loans. So, you shall research a bit on what interest rates they are offering. You can compare offers using various online tools. By comparing various lenders, you can get the lowest possible interest rate on your personal loan.

2.   Choose a Shorter Loan Tenure

Loan tenure is also an important factor that affects the interest rate. Loans with shorter durations have lower interest rates. This is because the lender is taking a risk of lending money for a shorter tenure. But at the same time, a shorter duration means higher EMI. So, if you can afford a higher EMI, you should go for a shorter tenure to get a low-interest benefit.

3.   Improve Your Credit Score

Your credit score is of utmost importance when it comes to borrowing. A higher credit score means you are a responsible borrower. This helps you get a personal loan at a lower interest rate. Hence, before applying for a loan, you should check your credit score. If it’s low, you shall improve it by following these ways:-

• Timely repayments of credit card bills and loan EMIs.
• Reduce existing debts.
• Don’t apply for multiple loan applications.
• Keep old accounts active
• Keep the credit utilisation ratio under 30%.

4.   Negotiate with Your Existing Lender

The best way to get a reduction in interest rates is by talking to the current lender. If you already have a salary account, fixed deposit or existing loan with a lender, then you can negotiate for lower personal loan interest rates. If you have made timely repayment of EMIs and have never defaulted, then you have a strong negotiating position. You can highlight your repayment history and improved financial position and ask for better rates.

5.   Go For Balance Transfer

If your existing lender is charging high interest on your personal loan, then you can also go for the balance transfer option. This means transferring the outstanding balance of the current loan to another lender that offers lower personal loan interest rates.

6.   Apply with Co-Applicant

You can consider adding a co-applicant to your loan application. Co-applicant can be your spouse, parents or any earning family member with good income and strong credit history. This can improve your loan eligibility and help you get lower interest rates.

7.   Maintain Stable Income and Employment

Lenders always prefer borrowers who have a stable job, consistent income and good repayment history. Salaried employees who work with reputed companies often get lower personal loan interest ratesas they are financially stable.

In a similar way, the self-employed individuals who have stable business income, proper income tax returns and healthy bank statements can qualify for better loan terms.

Conclusion

Personal loans generally have high interest rates in comparison to secured loans. This increases the overall interest burden. But there are smart ways to reduce the personal loan interest rates with proper planning.

In this blog, we have shared various tips by following which you can get an interest rate reduced. Whether you are opting for the loan for the first time or have a high interest on an existing loan, the strategies shared here work in both scenarios.