Personal Loans are a form of unsecured loans which are meant to help those in need of money. Personal Loans could be taken for a host of reasons, ranging from family functions to any other reason, provided that the bank agrees to your candidacy. Unlike most types of housing loans, the interest rates levied on Personal Loans vary according to a number of factors, depending on how well the borrower suits the preferred eligibility criteria set by the lender. This article is about the Personal Loan interest rate, and how it can be calculated and brought down as well.
Personal Loan EMI Calculation
The mode of repayment of most loans is in the form of equated monthly instalment (EMI), which has to be paid on a monthly basis to the bank. This EMI can be calculated by first dividing the interest rate set by the bank by 12 so that the interest rate per month can be obtained. The EMI calculator available on various websites can be extremely useful to you if you prefer to do this with minimal fuss – else, the Personal Loan Interest Ratecan be used to calculate the monthly EMI with the formula given below.
EMI = [P x R x (1+R)^N]/[(1+R)^N-1];
Here, EMI is the monthly instalment that the borrower owes to the bank,
P is the total amount the borrower has obtained a loan from the bank,
R is the rate of interest the bank levies (monthly rate) and
N is the tenure of the loan agreed by the bank (in months, not years).
Calculating the EMI using this method, even if the Personal Loan interest rate is available, can be a strenuous and complex process – therefore, it is better to use excel or an online calculator to circumvent this tedious calculation.
If you are thinking about taking a Personal Loan to help yourself out, using an EMI calculator can give you an idea of how much you will need to be shelling out every month. You can assess your financial capability with ease, and experiment with changes in multiple factors to understand how flexible you are regarding the structure of the loan.
However, how can you bring the interest rates on your loan down? There are some factors which affect the decision of the lender greatly, which are always wept under the mat. These factors can give you a better understanding of whether you will obtain the loan at the interest rate you desire or not.
Factors Affecting Interest Rates
- Credit Score
The credit score of a person is validation as to how he has performed in the past regarding repayment of any loans or credit card bills. Every payment made on a previous loan adds points to your credit score, and a higher credit score means that the person is more responsible when it comes to repaying the loan he has taken. Similarly, any late payments on the previous loans or credit card bills equate to a lower score, which serves as a warning sign to any future lenders assessing your candidacy for a loan. In most cases, a credit score of 650 is necessary to obtain a loan – a credit score greater than 750 is considered healthy and good, and anything higher will help you lower the interest rates levied on your loan. As your credit score declines, your interest rates increase too.
Income of the borrower is another important factor when you are applying for a loan. The lender needs to feel that the borrower is capable of repaying the entire amount due, so the income of the borrower is a huge factor in deciding the loan amount, tenure and the interest rates too. Borrowers who have a higher monthly income can get loans at a lesser rate, compared to those who have a lower income when applying for loans in the same terms.
This is another factor the lenders consider while lending money to applicants. This factor is an outcropping of the income one and works in increasing the credibility of the applicant. If the borrower is employed in a reputed organisation, the job itself is considered to be a more stable one. Therefore, this is equated to the person being able to repay the stipulated amount every month on time. This is easily visible when applying for loans since there are different terms for self-employed individuals and salaried employees in most cases. Applicants who are near the age of retirement will usually have to pay a higher interest rate, or the tenure of the loan may be low too.
- Relationship with the Lender
This is an unspoken bond, but it also affects the decision of the lender. If the applicant for the loan is a person who has been a customer of the bank for some time, he automatically gains an edge in the proceedings. This may not translate to lower interest rates in all cases – however, it can work in favour of the applicant.
Choosing the right Personal Loan for your needs can be difficult – there are a lot of options, from PNB Personal Loansto NBFCs like Bajaj Finserv. However, you are sure to get the right loan with the help you receive from the loan specialists!