Why Personal Loan Interest Rate is High? Here’s what you need to know

The personal loan interest rate average varies depending on the lenders. However, generally, these rates are higher than secured and other credit options. There are several reasons for this disparity and understanding the reason for it will help you make informed decisions.

So, read on to learn why a personal loan interest rate is high and more. 

Why are Personal Loan Interest Rates Higher? 

Loans are generally categorised are unsecured and secured. With the latter, you pledge an asset as collateral to get the required funding. However, unsecured loans don’t require collateral. 

Lenders request collateral as a security measure that can help them recover the loan amount if the borrower defaults. As such, their risk of lending to you is lower, allowing them to offer lower rates. 

However, if the loan is not backed by collateral, the risk is higher and lenders make up for it by levying a higher interest. Since personal loans come under this category, they can have a higher interest rate than other types of loans.

Also Read: Interest Rates on Personal Loans in India 2024

Factors Affecting Your Personal Loan Interest Rate

Here are some other possible reasons why a personal loan interest rate is high:

• Your Income

All lenders have different parameters for minimum income, which helps them manage their risk and ensure repayment. If the applicant’s income is low, lenders usually levy a higher rate to offset the risk.  

• Income Stability

The stability of an applicant’s income implies whether or not there is a consistent inflow of cash. As such, lenders generally offer lower rates to a salaried applicant with a long employment history. However, if you have swapped jobs several times in the last few years or have recently joined a new company, the rate you get may be higher. 

• Debt-To-Income (DTI) Ratio

Higher existing debt will reduce your chances of getting affordable rates. This is because too many ongoing loans raise your financial burden, which increases the risk of default. To offset this, lenders charge higher interest rates. 

• Your Credit Score 

Since it determines your creditworthiness, lenders rely on this metric to assess their risk of offering you a loan. A good score implies a higher possibility of repayment and therefore, can result in lower interest rates and vice-versa. 

• Loan Tenure 

Interest rates and loan tenure have inverse relationships, so with lengthy tenure, the rates increase. This is because, when you opt for a longer tenure, the risk for the lender can be higher and vice-versa. 

• Relationship With the Lender

Some lenders offer their existing customers lower rates provided they have a good repayment history. In some cases, these are exclusive offers to reward customer loyalty.  

• Economic Climate 

This is a critical factor as the rates offered are often linked to the repo rate set by the RBI. If the repo rate rises, the cost of borrowing increases and vice-versa. Additionally, a lender’s internal policy affects the range of interest rates they can offer to any applicant. This is also why the rate differs from one lender to another. 

Although personal loans can have higher rates, they are a popular instrument and there are ways to enjoy lower rates. Here are some tips you can try:

• Work to improve your credit score before applying 
• Maintain a good repayment history without any defaults
• Compare multiple lenders’ interest rates before applying
• Leverage your high-drawn salary or steady employment history
• Opt for tenure with a lower rate but ensure EMI is within your budget 
• Avoid applying for multiple lenders in a short duration 
• Apply with an existing lender

These tips will get you a personal loan at a lower interest rate and help you negotiate comfortable repayment terms. It also helps to apply with the right lender, and one option to consider is the Fibe Instant Cash Loan. Get up to ₹5 lakhs with interest starting at 2% per month and repay affordably. 

You can also choose a comfortable tenure of up to 36 months and prepay your loans without any charges. What’s more, with a 100% digital application, you can comfortably apply from your home and upload minimal documentation to get funds in minutes. Download our Instant Loan App or register on our website to get started. 

FAQs on Higher Interest Rates on Personal Loans

Why is interest on personal loans high?

These loans are unsecured and therefore, not backed by any collateral. This increases the lender’s risk, which they offset by levying higher rates.

Which type of loan has the highest interest rates?

Generally, unsecured loans have higher rates. These can include: 

• Personal loans
• Student loans
• Credit cards 
• Short-term business loan