No matter how well prepared you are financially, there are times when life may throw a curveball at you and you find yourself in a financial crunch. At such times all you need is somebody who can give you a fast and easy loan in a hassle-free manner. Personal loans are cut out for situations just like these as they are typically an unsecured source of finance that proves to be helpful when you are short of funds in an emergency. But before you take a personal loan, you need to understand how interest rates are decided. Here is a lowdown on all you needed to know about what influences the interest rates at which you can get the personal loan.

Types of interest rates

Lenders usually apply a flat interest rate for personal loans as it is an unsecured and short-term method of financing. On average, Personal Loan Interest Rates range from 12% to 36%. Interest rates can go as high as 50% depending upon the risk level as perceived by the lender. While personal loans rates are usually fixed, some lenders also give you the option of a floating rate of interest on a personal loan. This may prove to be beneficial if you take a loan in a falling interest rate cycle.

What impacts interest rates:

Your income or cash flow

Needless to say, your income or cash flow (if you are self-employed) has the most important bearing on the rate at which you can access loans. Each lender has set a minimum threshold for both salaried or self-employed individuals depending upon the city that he or she is located in.

Nature of employment

The nature of your job or the place you work in also has an impact on the interest rates at which you can get a loan. For instance, you may be eligible for a higher loan amount at a lower interest rate even with a lower salary in a reputed organisation as compared to a higher salary in a lesser known organisation. Similarly, if the nature of your work is perceived as “unstable” by the lender, or you have been shifting jobs very often you may find it difficult to get a low loan rate.

Existing relationship with bank

If you are an account holder with a bank for many years or have had a great relationship already with the bank for a previous loan that you have serviced, you may be at an advantage as you can then negotiate for a lower personal loan rate. Often banks are eager to get a good customer who have a good loan service record and may be willing to give you an interest rate for a personal loan that is lower than the prevailing rate of interest.

Your credit score

Your credit score is a three-digit score assigned to you by CIBIL, India’s premiere credit bureau. This score is computed on the basis of credit service record. If you maintain general financial discipline and maintain a score of 750 or more out of 900 you may be eligible for a lower personal loan rate as compared to a person with a poor CIBIL score.

Other options for borrowers

If you are finding it difficult to get a personal loan at a lower rate of interest from traditional lenders, you may consider getting a loan on a P2P Lending platform. These are innovative virtual loan marketplaces where borrowers can get in touch with individual lenders who are looking at earning stable inflation-adjusted returns. If your requirement matches with the expectation of the lender, you can apply for the loan directly and get a better personal loan rate as compared to a traditional lender like a bank or a financial institution, since you are not required to pay any intermediation fee.

P2P Lending platforms are also beneficial for borrowers as they do not rely merely on traditional methods of credit assessment but also take into account future repayment capabilities of the prospective borrower. Thus, those who do not have a good credit score may qualify for a loan on a Peer to Peer Lending platform, while those with a good CIBIL score may end up getting a better personal loan rate. Faircent evaluate a Borrower’s ability, stability and intent to repay their loan basis more than 400 data points across 120+ parameters. By using new-age technology Faircent’s fully automated credit evaluation mechanism is helping Borrowers access cheaper and faster personal loans. Faircent is India’s largest and only RBI certified NBFC-P2P platform. So in case of any requirements for personal loan, do sign up on Faircent.com