Are you looking for ways to pay the safety deposit while renting your flat? Or are you facing any medical emergency that might extend the coverage for your health insurance plan? With the help of a personal loan, you get access to a type of unsecured loan that helps you get instant access to cash in such financial emergencies.
Some of the common features of a personal loan are attractive interest rates, no collateral, no limitations on the use of funds, and speedy disbursement of the loan amount. The personal loan interest rate is an interesting factor to consider. Ultimately, this factor will determine your ease of repaying the loan amount and the overall burden of taking up a loan. You should, therefore, know how to calculate personal loan interest effectively.
What are Personal Loan Interest Rates?
When a bank or a financial institution lends you money in the form of a personal loan, the total cost of lending you the amount is earned through the interest rate. Ideally, a perfect personal loan setting is the one taken with a low interest rate. This is because this setting will minimize the total amount you are expected to pay back to the lender.
How to Calculate Personal Loan Interest Rates
Before you apply for a personal loan, you should know how to calculate personal loan interest rates in the first place. This knowledge will help you make the best decision when it comes to choosing the best personal loan plan for funding your expenses.
To calculate the personal loan interest rate, you need to calculate the EMI first.
EMI = P X R (1+ROI) ^ N / [(1+ROI)^N-1]
In the above formula, P refers to the principal amount, N refers to the loan tenure in months, ROI is the monthly interest rate. The ROI is calculated as = Annual Rate of Interest/12/100.
Example:
If the annual ROI for personal loan is 10%, then you will get the monthly ROI as (10/12/100) = 0.0083.
In case the Principal Amount (P) is INR 20,000 and the Loan Tenure (N) is 36 months, then your EMI will be INR 64,534. The total interest payable will be INR 3,23,237.
As you calculate the personal loan interest rate, here are some factors to consider:
- Credit History
The interest rate on your loan will depend on your credit history or credibility. When you have a good credit history, it implies that you have been able to repay your previous loans or credit card bills effectively. This feature will improve the trust of lenders in your credit profile.
The CIBIL or Credit Information Bureau of India Limited is a leading credit information organization that has been licensed by the RBI. CIBIL or the credit score is an industry-accepted score that is used to understand your credit history.
Typically, a CIBIL score is a 3-digit score that ranges between 300 and 900. A score that is above 700 is regarded as a good credit score. This credit score can help you get reduced interest rates on the personal loan you apply for.
Before you apply for a personal loan, it is recommended to check your credit score. This will help you understand your positioning. In case the credit score is low, this might be because you are not paying your bills or debts on time. Eventually, you can improve your credit score with the help of preventative measures, like paying off all your debts on time. You can also get rid of any existing debt to improve your credit score.
Your credit report unveils your credit payment history across all credit an debt institutions. According to RBI, it is mandatory for all credit information companies to offer one free credit report every year.
- Monthly Income
You could be a self-employed person or a salaried individual, irrespective of your current position, banks or lenders tend to look into your loan application based on your monthly income. When you present a higher income, it offers lenders more assurance that they will get their money back on time.
As such, a higher monthly income improves your chances of getting personal loan approval. Moreover, this factor also helps with minimizing the personal loan interest rate. The number of years you have been involved in an organization also plays an important role. The longer you have been employed at an organization, the better chance you have at negotiating for a better interest rate.
- DTI
The Debt-to-Income Ratio is the parameter determining your monthly debt payments divided by the gross income. This parameter is expressed in the form of a percentage. Lenders make use of the DTI to understand how you are managing your existing debts. They also use this parameter to analyze whether or not you are capable of repaying the loan amount.
The higher your loan obligations, the higher your DTI. Ideally, your DTI should range between 21 and 35 percent. When you have a lower DTI, it improves your chances of getting low personal loan interest rates.
Does a Personal Loan Affect Credit?
When you take on more debt, it will indeed affect your credit. However, how you repay the loan amount will determine the positive or negative effects on your credit. When you ensure timely repayment of the loan amount, you can improve your credit score.
Conclusion
Understanding the factors that affect your personal loan interest rates will help you ensure the best decisions and get access to the best deals. When you maintain a high credit score and choose the right loan tenure, you can minimize your overall borrowing costs and ensure repayments effectively. With the help of a well-planned personal loan, you can get ample financial support without feeling overwhelmed by the situation.