A personal loan is an unsecured credit that individuals can borrow from banks and other financial institutions for various purposes including short-term financial needs – be it holidays, marriage, car purchases, home renovations or even personal and medical emergencies. It does not require any collateral or security and requires the least amount of documentation. Personal loan interest rates vary across banks and other financial institutions depending on the credit score of the lender and borrower, besides the financial history of the applicant. It is advisable to apply for personal loans after calculating interest rates, processing fees and EMI. In fact, the interest rate is the most critical aspect to be considered while applying for personal loans.
A low interest personal loan would mean low EMIs. Banks and financial institutions consider various factors including the type and profile of the borrower while deciding on personal loan interest rates.
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What factors affect the interest rates on personal loans?
To avail of personal loans with a low rate of interest, the lenders take into consideration multiple factors including the background, profile, and the type of loan applicant. Here are some of the critical deciding factors –
Income and Organisation:
The income/salary of the borrower is a crucial factor for lenders while deciding to give a personal loan. The bigger the income, the lower the rate of interest. Personal loans with low rates of interest are disbursed once the bank is convinced that the individual earns a good income – salaried individuals have better chances of getting low-interest rates, more than self-employed as the latter’s income is not fixed. Besides, an individual working for a big corporation or a reputed institution is more likely to get a personal loan with low interest rates because of the stability that a bigger workplace provides which leads to regular repayment of loans by the borrower.
Credit Score:
Lenders will always look at the credit score of the borrower to understand the individual’s creditworthiness. It is a measure of an individual’s ability to pay back the borrowed amount. It is a 3-digit numeric rank given by the Credit Rating Agency to individuals based on their repayment history and the higher the credit scores are, the better their chances of securing a personal loan with a low rate of interest. A credit score (also known as CIBIL score) between 750 and 900 is considered ideal and safe by most lenders and this becomes a deciding factor for banks and financial institutions to determine personal loan interest rates. Irresponsible repayment records apart, applying for multiple credits from various lenders over a short period will also adversely affect the borrower’s credit report.
History of the Loan Payment and FOIR (Fixed Obligation to Income Ratio):
An individual’s record of loans and their repayment will be carefully assessed before sanctioning the personal loans or personal loan interest rates are decided. If the borrower was diligent and disciplined with repayment in the past, the lenders will be more confident and trusting and will be able to provide low interest personal loans.
Banks assess whether the individual has defaulted on payments in the last 12 months and if there has been a delay or default, either the personal loan application is rejected, or a high-interest rate is charged. Apart from this, the ratio of the borrower’s pre-existing EMIs and credit card dues to the borrower’s monthly income, also known as FOIR or debt-to-income ratio, is also evaluated by the lenders while deciding on personal loan interest rates. If FOIR is on an average between the range of 40% to 50%, the situation is ideal, and the borrower is considered as having the capacity to pay back the loan on time. Above 50% is not good news to lenders and sanctioning and personal loan interest rates will be impacted as a result.
Banking Relationship:
The borrower’s history of bank deposits, savings account, salary account, credit card, etc is also a determining factor to avail loans with low-interest rates. If the individual had been a loyal customer of the lender, it would be beneficial for the borrower to get the best personal loan interest rates. An interpersonal relationship with the bank staff over the years, along with consistency in availing the services of the bank can help the customer get loans with low interest rates.
Type of Applicants:
While background, employment history and income are deciding factors in securing low-interest loans, what is also considered is the type of personal loan applicant.
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Salaried/Self Employed
Self-employed people may not be considered safe bets as the income is not fixed whereas salaried individuals are perceived as people with stable jobs and stable income. So, a salaried individual with a reputed organisation has better chances of getting personal loans with a low rate of interest than a self-employed individual.
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Women
Certain financial institutions, to encourage women entrepreneurship or promote salaried women to become financially stable, give out personal loans with low interest rates. HDFC, Bajaj Finserv and Fullerton India offer attractive interest rates for women.
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Retired Pensioners
Banks like State Bank of India (SBI), Bank of India (BOI) and UCO Bank provide low interest personal loans to pensioners, especially if they have been active customers of these banks.
Here is a look at the personal loan interest rates of different banks and NBFCs in India
Current Personal Loan Interest Rates – 2021
| Banks/NBFCs | Interest Rate (p.a.) | Loan Amount (Rs.) | EMI/1 lakh for 1 year (Rs.) |
| State Bank of India | 9.60% onwards | Up to 20 lakhs | 8,773 |
| Central Bank of India | 8.45% onwards | Up to 20 lakh | 8,720 |
| Union Bank of India | 8.90% onwards | Up to 15 lakh | 8,741 |
| Punjab National Bank | 8.95% onwards | 25,000 to 15 lakh | 8,743 |
| Indian Bank | 9.05% onwards | As per the applicant profile | 8,747 |
| Bank of India | 9.35% onwards | Up to 10 lakh | 8,761 |
| IDBI Bank | 9.50% onwards | 25,000 to 5 lakh | 8,768 |
| Bank of Maharashtra | 9.55% onwards | Up to 20 lakh | 8,771 |
| UCO Bank | 8.45% onwards | Up to 10 lakh | 8,720 |
| HSBC | 9.75% onwards | Up to 30 lakh | 8,780 |
| Citibank | 9.99% onwards | Up to 30 lakh | 8,791 |
| Bank of Baroda | 10.00% onwards | 50,000 to 10 lakh | 8,792 |
| Kotak Mahindra Bank | 10.50% onwards | Up to 30 lakh | 8,803 |
| Indian Overseas Bank | 10.30% onwards | Up to 15 lakh | 8,,806 |
| Federal Bank | 10.49% onwards | Up to 25 lakh | 8,814 |
| ICICI Bank | 10.50% onwards | 50,000 to 25 lakh | 8,815 |
| IndusInd Bank | 11.00% onwards | 50,000 to 15 lakh | 8,838 |
| IDFC First Bank | 11.00% onwards | Up to 40 lakh | 8,838 |
| Axis Bank | 11.00% onwards | Up to 15 lakh | 8,838 |
| Standard Chartered Bank | 11.00% onwards | 1 lakh to 50 lakh | 8,850 |
| Bajaj Finserv | 11.49% onwards | Up to 15 lakh | 8,861 |
| Tata Capital | 11.75% onwards | Up to 20 lakh | 8,873 |
| StashFin | 11.99% onwards | 1000 to 5 lakh | 8,884 |
| Faircent | 12.00% onwards | Up to 10 lakh | 8,885 |
| Kreditbee | 12.24% onwards | 1000 to 2 lakhs | 8,896 |
| Yes Bank | 12.49% onwards | Up to 50 lakh | 8,908 |
| HDFC Bank | 12.50% onwards | Up to 25 lakh | 8,908 |
| MoneyTap | 12.96% onwards | 3000 to 5 lakh | 8,930 |
| Fullerton India | 13.00% onwards | Up to 25 lakh | 8,932 |
| Indiabulls | 13.99% onwards | 1000 to 15 lakh | 8,978 |
| RBL Bank | 14.00% onwards | 1 lakh to 20 lakh | 8,979 |
| Muthoot Finance | 14.50% onwards | 50,000 onwards | 9,002 |
| Money View | 15.96% onwards | 5000 to 5 lakh | 9,071 |
| PaySense | 16.80% onwards | 5000 to 5 lakh | 9,111 |
| Early Salary | 18.00% onwards | Up to Rs. 5 lakh | 9,168 |
| Home Credit | 24.00% onwards | Up to 2.4 lakh | 9,456 |
| CASHe | 33.00% onwards | 6000 to 4 lakhs | 9,897 |
| HDB | Up to 36% | Up to 20 lakhs | 10,046 |
Steps To Avail Personal Loan with Low Rate Of Interest
Eligibility
The minimum personal loan eligibility is:
– The applicant should be at least 21 years of age at the time of loan application
-The applicant’s minimum net monthly income should be Rs. 25,000.
– The applicant should have completed a minimum of two years of employment and should have completed one year in the current organization
- Employees working in private companies, public companies and central, state, and local bodies are eligible to apply
- Should have completed a minimum one year of stay at the current residence, if rented
Once the eligibility criterion is taken care of, the next step is to ensure all the parameters to avail low interest personal loans are met. This includes
Compare All Offers
When looking for a personal loan with low interest rates, it is important that the applicant has details of interest rates of every bank or institution in front of him or her. It is important to visit the websites of every bank to understand the interest rates and processing fees and make an informed comparison and then choose the best option as per the requirement. It is when a comparative analysis is done when an individual can stumble upon attractive offers and select the best personal loan interest rates.
Apply With a Known Lender
A known bank or financial institution through which the individual has been continuously doing transactions and making deposits is more likely to give preferential interest rates than an unknown financial entity. The relationship the individual has with the bank can lead to the bank giving discounts and offers and loans with low interest rates. Because of the familiarity, a trust is built and that will lead to better offers on interest rates.
Maintain a Good Credit Score
The credit score determines the individual’s credit worthiness and the lesser the debts and loan defaults, the better the credit score of the individual will be. If the credit score is high (750 and above), the chances of getting a personal loan with low interest rates is high. So, it is always advisable to ensure that a healthy credit score is maintained and that is possible by keeping a track of all the financial transactions and being a responsible lender.
Leverage Work Credentials
For a lender, a stable employment status is important as it indicates the individual has the means to pay back the amount on time. If the borrower has a stable job in a reputed organisation, then the chances of him/her getting personal loans with low rates of interest are high. Hence the borrower should leverage his/her position and reputation of the company to secure good interest rates.
How to Calculate Interest on a Personal loan?
The rate of interest charged by banks and other financial institutions is calculated by considering various important factors –
CIBIL Score
This score indicates your creditworthiness. The better the CIBIL score is, the better the interest rate will be. As per the policies of the lender, the minimum CIBIL score to avail of a personal loan varies.
Principal Amount
A good repayment history will give the borrower a better chance of obtaining larger amount of personal loans with minimum interest rates.
Loan Tenure
If the repayment tenure is shorter, then the interest rate will be lower.
Personal Loan Interest can be calculated using –
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Flat Rate Method of Interest Calculation:
In this method, the personal loan interest rate is calculated on the initial principal amount without accounting for the principal repaid. Here the lending rate remains unchanged throughout the loan tenure. This method of interest calculation results in a higher EMI.
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Reducing Balance Method of Interest Calculation:
In this case, after every EMI payment, the outstanding loan amount gets reduced. Therefore, the interest for the next month is calculated only on the outstanding loan amount. Here interest is calculated on this decreasing loan amount and not the total amount initially borrowed. So, the personal loan interest rate is calculated on the principal amount outstanding at the end of a specific period.
How to Calculate EMI on a Personal Loan
The interest on a personal loan is calculated in the following manner:
EMI = [P x (R/100) x {1+(R/100)} ^N]/[{1+(R/100)} ^(N-1)]
Where,
EMI = equated monthly instalments
P = the principal amount borrowed
R = loan interest rate (monthly basis) = annual interest rate/12
N = loan tenure (in months)
Let us assume that a borrower borrows a sum of Rs. 7 lakhs at a rate of 12% for a tenure of 5 years, the interest for the 1st month will be calculated as follows:
(7, 00,000*0.12/12) =7,000
These are the top 10 banks in India offering the lowest interest rates on personal loans:
Top 10 Banks Offering Lowest Interest Rates -2021
| Bank Name* | Interest Rate | Processing Fees |
| State Bank of India | 9.60% onwards | Up to 1.5% |
| Central Bank of India | 8.45% onwards | Up to Rs. 500 |
| Union Bank of India | 8.90% onwards | 0.50% |
| Punjab National Bank | 8.95% onwards | Up to 1% |
| Indian Bank | 9.05% onwards | Up to 1% |
| Bank of India | 9.35% onwards | Up to 2% |
| IDBI Bank | 9.50% onwards | Up to 1% |
| Bank of Maharashtra | 9.55% onwards | Up to 1% |
| UCO Bank | 8.45% onwards | Up to 1% |
| HSBC Bank | 9.75% onwards | Up to 1% |
Always Remember
Make Repayment a Priority:
Paying your credit card bill on time and another EMIs without delay is important to get a better deal on interests. You can negotiate better when you have a responsible credit history.
Look for Deals and Offers:
Keep looking for seasonal offers and schemes that banks introduce, especially in the festive season which will promise lower interest rates on personal loans,
Calculate Interest Carefully
Even if the interest offered is low, you may end up paying more, especially if you are taking on a flat interest rate. Take into consideration the processing fee of each bank too, which varies amongst banks.
Customer Service of Banks
Go for banks and institutions that offer impressive customer service and regular assistance in loan sanctioning and repayment etc.
Conclusion
To summarise, personal loan is among the most hassle-free loans disbursed by banks and other financial entities. If the lender is convinced of the applicant’s repayment capacity after evaluating the credit scores, income level and employment history, the borrower is likely to get good deals on interest rates. While the interest rate on personal loans stands to vary among lenders, if the borrower keeps an eye on offers, does a comparative analysis on all the interest rates, leverages the employment status, and maintains a great credit score, he/she will attract the best interest rates possible to fulfil the financial goals.
