When you apply for personal loans, credit cards, or any other form of credit, the interest rates vary depending on the bank or financial organisation. They also change depending on your credit score and other personal factors, defining the risk a lender takes in giving you a loan.
My Personal Loan Interest Was Increased. Is That Normal?
Other than lenders quoting different rates, you may also notice the same lender quoting higher interest rates for the same loan at different times. With revolving credit, such as a credit card or personal line of credit, rates may be variable even on existing products.
If you are paying a higher rate of interest on personal loans than friends and family, or your interest rate has increased recently, here are some of the possible reasons:
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Drop in Your CIBIL Score
Your credit score and credit history will affect your ability to get a loan and how much interest you need to pay on it. If your credit score or CIBIL score has dropped recently, lenders may quote you higher interest because they see you as a high-risk consumer.
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Unstable Career/Income
Interest rates may increase in case you have been switching jobs or changing careers too often, or are unable to provide proof that you work in a reputable organisation with a steady income. This is because lenders will have no way to be sure you can pay back the loan.
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Poor Repayment History
Missing out on EMI payments or making too many late payments for existing loan products shows an inability to manage credit properly. Not only will lenders be more likely to charge you higher interest on credit extended in the future, but also heavy penalties and late fees.
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Relationship between the Lender and Borrower
Your relationship with your lender matters when it comes to the interest rate you get. Being a loyal customer often means you'll get a better deal with lower rates because your lender knows you well. So, it's important to build trust with your bank early on to secure good rates.
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Debt-to-Income Ratio
This measure looks at how much of your income is taken up by your existing debts. If you earn a lot but most of it goes towards paying off debts, lenders might see you as a riskier borrower. As a result, they could charge you a higher interest rate on any loans they offer. A high debt-to-income ratio is generally seen as a financial burden for borrowers, leading lenders to adjust interest rates accordingly.
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Moving Home Too Often
Hopping from residence to residence can also affect your interest rates, signaling instability the same way as job-hopping does. Switching cities or moving home within the same city while you have an existing loan can make lenders wary of giving you another at low rates.
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Multiple Unsecured Loans
Applying for multiple loans or credit cards at the same time is one way that your credit score may go down, and consequently, interest rates go up. The same thing applies when you have too many existing loans, especially if those are not secured with a deposit or collateral.
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Lack of Proper Research
If you want competitive interest rates, you need to put in the time and effort to find the right loan product. In addition to comparing different loans, you also need to be aware of the base rate charged by banks, as well as the rules and regulations that apply to the lending market.
Closing Thoughts
Personal loan interest rates are generally lower than those of credit cards, making them a useful option for paying off credit card bills or consolidating debts. However, it's crucial to borrow responsibly and use the loan amount wisely.
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Frequently Asked Questions
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What influences the interest rate you're offered on a loan?
The interest rates on loans are influenced by various factors. These include credit risk, loan duration, tax implications, and how flexible the repayment terms are.
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Why is my loan interest rate so high?
If you're borrowing a lot, lenders might see it as riskier and charge you higher interest rates. Also, if you're taking longer to pay back the loan, you might have to pay more in interest because there's more risk for the lender.
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How can I get a lower interest rate?
Paying your bills on time, not using too much of your available credit, not asking for lots of loans all at once, and not opening too many new credit accounts can all help you get a better interest rate.
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Can I talk to my lender about lowering my loan interest rate?
Sometimes, it's possible to discuss lowering the interest rate on your personal loan, depending on the lender and how good your credit is.
