How to reduce interest rate on a personal loan

K. ARAVIND

If you want to take a gold loan, you need gold in hand to pledge. Only those who have insurance policies, mutual fund units and mortgages can take loans. For those who have nothing to risk, relying on a personal loan is the only solution; especially for young people who do not own assets such as gold or mutual funds.

The interest rate on a personal loan is high because it is a non-performing loan. However, the interest rate can be reduced depending on the various criteria of the borrower.

The best way to reduce the interest rate on a personal loan is to maintain a good credit score. The customer’s previous credit history, the loan amount applied for, and the nature of the institution in which he or she is employed will be considered when evaluating the loan eligibility.

With a credit score above 750, you can bring down the interest rate on your personal loan. Paying credit card bills and EMIs on time can improve your credit score. The credit score will improve if you make more than 30% of the maximum loan amount you can borrow.

Checking the credit report over a period of time can help you assess where your credit score stands. Credit score can be found online. Try to minimise credit card borrowing. It is also not a good idea to have too many credit cards. Do not increase the number of credit cards by submitting new applications as per the offer.

If there are existing loans, the creditworthiness will decrease accordingly. The bank will determine the loan amount that you can allow, taking into account the salary and the loan instalment. Closing of existing loans with outstanding repayments period to increase creditworthiness will be helpful. This will help you to improve your credit score and ensure a better interest rate.

The nature of the consumer is an important factor in determining creditworthiness. If you have a history of repaying loans in the past without defaulting, it will be beneficial to take out a new loan. If you have recently moved to a city where you currently live as per job demands, you will be considered a high risk customer. If it’s your first job, the risk is even higher. At the same time, if you have a salary account in the bank, if you have a long transaction history and a good income, the bank will consider you as a low risk customer.