How to get better interest rate on a personal loan

The interest rates on personal loans are usually higher than those of others like home and auto loans. Therefore, the best you can do when applying for a personal loan is to try and get one at the lowest interest rate feasible given other constraints.

Generally, before sanctioning a personal loan the lender considers several factors such as the loan amount you have applied for, your repayment capacity and possibly the company you are working with. Here are six ways how you can get a personal loan at a lower interest rate.
1. Maintain a good credit score
You can improve your credit score by gradually clearing your debt over a period of time. A score of 750 and above gives you a higher chance of getting a better personal loan deal. Gaurav Aggarwal, Head of Unsecured Loans, Paisabazaar.com lists a few ways you can maintain a good credit score.

• By maintaining your credit utilisation ratio (the ratio of how much credit you have currently taken divided by your overall credit limit) within the 30 percent limit.
• By checking your credit report at regular intervals (when you make credit score enquiries with the credit bureau or online financial market place they are considered as soft enquiries and hence, do not impact the credit score).
• By avoiding direct loan and credit card applications to lenders and maintaining a healthy credit mix of both secured as well as unsecured loans.

Aggarwal adds, "In addition to this, you should monitor your guaranteed or co-signed loan account to ensure timely repayment, as any form of delay or missed payments on the primary borrower's part can adversely impact the credit score of both co-signor/guarantor and primary borrower of the loan."

2. Maintain a good repayment history
Try to pay your credit card bill in full and clear off your debts every month. You should also pay the equated monthly installments (EMIs) of other loans, if any taken earlier, on time. This helps you in getting a better deal whenever you take another loan in future. This is because if your EMI repayment history is good, you will have a better chance to negotiate on interest rates with the lender.

3. Compare interest rates, look out for seasonal offers
Based on their loan eligibility and requirement, loan applicants should consider visiting an online financial marketplace to compare and choose among various lenders offering personal loans. Additionally, you must also check with your existing lenders with whom you have an existing relationship as they often offer personal loans at a relatively cheaper interest rate and better service terms.

Adhil Shetty, CEO, Bankbazaar.com said that often during the festive season, banks launch attractive schemes offering personal loans at lower interest rates. "If you want a personal loan, availing it during such times is beneficial as this can help you cut down on your loan expenses," he said.

4. Check interest calculation method
It may happen that despite a lender giving you a personal loan at a low interest rate you may end up paying a higher interest amount at the end of the loan tenure. This is because the method of calculating the total interest payable can differ among lenders. Therefore, before availing a personal loan, you should always understand the method of calculation of the interest payable.

The lender may give you a loan either at a flat interest rate or at a reducing interest rate. In case of flat interest rate, the payment of interest is calculated on the full loan amount throughout its tenure. However, in the case of reducing interest rate, the payment of interest is calculated on the outstanding principal, where EMIs gradually reduce the principal amount. This way, availing a personal loan at a flat interest rate could cost you more than availing a personal loan at a reducing interest rate.

5. Credibility of employer
Employees working with reputed/blue chip companies, multinational companies etc. may be able to get favourable deals. This is because their employers' ability to provide a steady job is higher and therefore it is expected that the borrower would be more likely to have a stable income and be able to repay the loan dues on time.

6. Your employment history
Satyam Kumar Co-founder & CEO, LoanTap said that job stability, residential stability and maintaining good FOIR (Fixed Obligation to Income Ratio) helps build a good credit score which partly impacts the interest rates as well. "Some lending institutions also look into factors like repayment capabilities, fixed income, and customer profile to arrive at the interest rates offered to borrowers," he said.

Shetty said that most of the time before sanctioning the loan, the bank requires you to have an employment history of at least two years, including one year with your current employer. Lending institutions look favourably at loan seekers employed with the state or central government, PSUs or quasi-government organisations. This reflects in the interest rates offered, which may sometimes be lower in comparison to rates offered to those who aren't government employees. "Your reputation and financial stability can also play a role in deciding the loan interest rates," he said.

Points to note

• It is prudent to check what the personal loan offers. Basically, one should check the service terms offered by various lenders before zeroing in on any lender. Make sure you base your decision not only on the interest rate offered but also on loan tenure, processing fee, prepayment charges, loan amount etc.

• The lender may not give you a good deal if you have already taken too many loans. Also, if your CIBIL score is below 700, then it can even lead to rejection of your personal loan application.