A standard personal loan usually has a high rate of interest. Further, it varies significantly from one lender to another. With this, you may have a question in your mind as to how a lender determines the rate of interest for an applied personal loan request. Well, there are a couple of factors for the same. Here are these factors apart from the credit score:
Type of Borrower
The main reason why interest rates differ from lender to lender is the type of borrower being considered. A few lenders only consider those with good or great credit scores, while some cater to those with fair or low credit. The latter creditors will typically levy a higher interest rate than the former ones. A few lenders seem to consider all credit profiles and levy rates accordingly.
Debt-to-Income (DI) Ratio
This ratio shows how much of the existing gross income needs to be given to fulfill your debt. For instance, if the monthly debt is $4,000 per month and the gross monthly income is $10,000, the DI ratio is 40%.
Several lenders such as credit card issuers and mortgage lenders consider this ratio for deciding the rate of interest. Most lenders prefer a low DI ratio, which should be usually below 45%. However, the benchmarks are likely to vary from one lender to another. Liabilities likely to affect the credit score like bill payments are not included in the total debt.
Personal loan lenders give priority to borrowers with sufficient income and/or steady employment status. They typically consider the income or employment records of the last two years although they can ask for records beyond this duration.
As a rule of thumb, applicants having a low income hardly are considered eligible for the most competitive interest rates. Further, most lenders prefer employed borrowers, as opposed to freelancers, solopreneurs and small business starters.
Consideration of education status significantly varies from one lender to another. A few non-traditional ones tend to consider education while not significantly weighing the conventional credit factors. According to them, a young borrower with specialised degrees will always have good earning opportunities due to which there will be no risk even if the current credit history is not that good.
Borrowing a sum that is considered as a high-principal loan fetches a higher rate of interest. The reason is obvious; the lender perceives your application as a riskier deal.
Usually, several lenders will not give a high loan amount to those whom they perceive to be ineligible. In case of a fair credit score, you may be offered somewhat less than what you applied for.
A personal loan taken for a longer duration than usual, such as five or seven years, attracts a higher rate of interest. Such a loan could be costly for you, as the interest gathers for longer.
You can either get a secured loan or an unsecured loan. A secured loan is guaranteed by an asset the borrower must forgo if she or he defaults. This is collateral. Thus, a secured loan will always attract a lower rate of interest than an unsecured loan. The latter is deemed riskier for the lenders, as there is no collateral involved.
Most personal loans involve no collateral. In case you want a personal loan to pay off an expense that could be sponsored with a secured loan, it is wise to check out the secured options.
If you are aware of these factors, you can easily strengthen your borrower profile to get a reasonable rate.