Do personal loans have unusually high interest rates?
The rate of interest on personal loans is primarily established by financial institutions on the basis of a borrower’s repayment ability.
A personal loan is an easy solution to finance either a long-term or an emergency goal with a repayment schedule chosen according to the borrower’s capacity. Besides, the processing time and disbursal of a personal loan are relatively quick. This makes it an attractive option for those looking to avoid elaborated paperwork to get a loan approved. While other loans are specific in nature (like car or home loan), a personal loan can be taken to suffice any financial need. Since such loans are unsecured in nature, the interest rate is high. But is that really so?
Interest rate depends on your credit score
The risk of a personal loan lies in the fact that it is collateral-free, hence the charges are slightly higher than other loans, but the benefits of the loan make it one of the most popular kinds of loan to avail. The rate of interest on personal loans is primarily established by financial institutions on the basis of a borrower’s repayment ability and CIBIL score. Therefore, the assumption that such loans demand unsually high rates may not be entirely true.
“We offer personal loans to people with low or zero credit history who don’t really have a chance to get loans from mainstream financial institutions. In this case, as mentioned above, loans can also be provided at lower interest rates compared to other NBFCs through repayment capabilities, CIBIL scores and various other behavioral factors. The focus for us is to reach customers who are likely to use pay-day loans or borrow from unregulated community lenders,” said Charlie Lee, founder at True Balance, RIB licensed lending platform.
What is an ideal credit score?
The credit score plays a vital role for unsecured or collateral-free loans since the risk is relatively higher compared to other loans. If you ever want to take an emergency personal loan, your credit score will play a crucial role in the process. Not just at an individual level, even corporate companies are given credit ratings that impact its ability to seal investments.
A CIBIL score above 750 is considered ‘ideal’ and will help you get through high-risk personal loans and credit cards at a comfortable interest rate. The rate of interest on personal loans is primarily established by financial institutions on the basis of a borrower’s repayment ability. However, if your score is below 750 then it may be tricky and/or expensive for you to borrow funds from banks or NBFCs. Scores somewhere near 750 can fetch you a loan but at a relatively higher interest rate but if the scores are way below 750, the application can simply get rejected.
Is interest rate higher for non-salaried class?
Another raging myth about personal loans is that only those people who draw salaries can apply for this. For non-salaried customers, the interest rate can simply be skyrocketing. Is that entirely true? Not really. Even self-employed individuals can get personal loans basis their credit history.
“It is not entirely true that loans are expensive for non-salaried people. The probability is low, but it is not unheard of. For True Balance, we use our ACS (alternate credit-scoring) system to understand the financial profile of a customer along with the loan amount availed for the interest rate. Our loans are given without collaterals, and that is a risk factor, however, we aim to be the first option for people to borrow money instead of depending on an unregulated sector,” pointed Lee.
As we step into the new normal, one must move over traditional legacy banks and explore various digital lenders who offer personal loans with much ease. However, you must do a background check and clear your doubts before opting for their services.