What
are the two questions that Personal Loan applicants ask while Applying for a Personal Loan?
· What is the
loan amount that I will get?
· What will be
my monthly repayment schedule?
Eligibility:
Your
loan eligibility depends on the following factors:
· Your income –
Banks have different stipulations for the income of the applicant.
· Your
employment status – Salaried employees have an advantage over the self-employed
professionals and non-professionals.
· Your repaying
capacity – Banks calculate your repayment capacity based on your fixed
obligations to income ratio. Higher the Fixed Obligations to Income Ratio (FOIR),
lower will be your eligibility.
· Your credit
score – Banks stipulate the minimum credit score in the range of 700 and above.
It is difficult for applicants having a lower credit score to get Personal Loans.
Rate of interest:
Banks
usually charge interest on a floating rate basis on the reducing balance
method. Some banks charge interest at fixed rates for tenure less than 3 years. Both these calculations are on the
reducing balance method.
Some
NBFCs (Non-Banking Financial Companies) charge interest on a flat rate basis.
Under such circumstances, the banks charge simple interest on the loan amount
at a pre-determined rate and divide the total of the principal and the interest by the tenure to arrive at the monthly
instalment amount.
Which of these two calculation methods is better?
It
depends on the rate of interest. The flat rate might appear to be less than the
floating rate, but overall the floating rate (on reducing balance method) is
beneficial. Let us see how the banks calculate the EMI (on reducing balance
method) as well as the flat rate method.
We
assume the following data
· Principal
amount – Rs. 1,00,000
· Loan tenure –
36 months
Reducing Balance method
|
Flat rate method
|
||||
Rate of interest
|
EMI
|
Total Interest outlay
|
Rate of interest
|
Instalment
|
Total Interest outlay
|
14.50%
|
Rs.
3,442
|
Rs.
23,916
|
9.00%
|
Rs.
3,528
|
Rs.
27,000
|
You
can see from the above calculation that the rate of 14.50% is better than 9%
because of the advantage of the reducing balance method.
What are the factors that influence your Personal Loan interest rates?
Various
factors influence the Personal Loan interest rates. The rate of interest is the
deciding factor to determine your Equated Monthly Instalment (EMI). Let us now
discuss these factors in brief.
· Your income –
Higher your income, lower is the interest rate charged by the bank. It is
because a higher income reduces the chances of defaults. There is a lower risk perception. Hence, the rate of
interest is lower as your income
increases.
·
The status of
employment – Salaried employees have an
advantage because of the stable nature of their income. The stability in the
income levels results in a lesser risk for the bank. The self-employed
professionals and non-professionals might be having a higher net income as
compared to the salaried class. However, their income is a fluctuating one. Therefore,
banks consider this category of applicants as riskier than the salaried class.
Consequently, the rate of interest is higher in comparison.
·
Your credit
rating – The recent spurt in the NPA (Non-Performing Assets) position in the
banks has brought in a new trend. Banks are trying their best to woo customers
having excellent credit scores in the range of 700 and above. Naturally, you
need to give concessions in the rate of interest. Higher your credit score,
lower is the rate of interest. It automatically affects your EMI.
·
The nature of
your employer – All salaried employees do not get the same treatment from
banks. The nature and reputation of the
employer play a deciding role in the rate
of interest for Personal Loans. Employees of the State and Central Government
departments, Public Sector undertakings, and so on, receive a preferential rate
of interest because of their job stability. Similarly, employees of top-rated
corporate companies get benefits because their employees do not usually shift
jobs. It is not the case with the un-rated companies where you witness frequent
chopping and changing of jobs. It makes
these employees vulnerable. Therefore, banks charge a higher rate of interest
on Personal Loans offered to such employees.
How it affects the EMI?
The
EMI depends on three factors:
a) The loan
amount
b) The loan
tenure
c) The rate of
interest
The
loan amount and loan tenures are common factors. However, the rate of interest
is the variable factor for a Personal Loan
that determines your EMI. Hence, a higher percentage
of interest results in a higher EMI for a given loan amount and tenure. Thus,
we can say that the EMI is the best deciding factor for a
Personal Loan.
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apply online for Credit Cards, Secured Loans and Unsecured Loans, visit www.mymoneymantra.com,
the leading online lending marketplace that offers financial products from 70+
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