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Factors Affecting Personal Loan EMI and Interest Rates

Updated: Apr 17

Author: Natasha Rei 

Publication date: 11.09.2023

This post may contain affiliate links, which means I may receive a small commission, at no cost to you, if you make a purchase through a link

Natasha Rei is the Digital Marketing Manager of Explainerd, an explainer video production agency. She ensures strategic goals are met by directing online and social media campaigns.

Factors affecting personal loan

An instant personal loan provides you with the flexibility to access funds for emergencies without any restrictions on how you use them. Whether it's for personal or business purposes, these loans don't require any collateral.

However, to ensure you secure the best interest rates and avoid any difficulties in repayment, it's essential to consider the factors that affect your personal loan EMI and interest rates. By utilizing an online loan EMI calculator, you can effectively understand and manage your monthly installments.

1. Income

Your income level plays a significant role in determining the interest rate you are offered. Typically, banks charge lower interest rates to borrowers with higher-income jobs compared to those with lower-income jobs.

Banks rely on individuals with higher incomes as they have a better financial standing, increasing the likelihood of timely loan repayment. On the other hand, borrowers with lower incomes may face repayment challenges, leading banks to offer them higher interest rates.

2. Terms of Repayment and Loan Amount

The loan amount and the repayment terms also affect your personal loan EMI. If you borrow a higher principal amount, you will have to pay a larger EMI every month. Conversely, opting for a longer loan term reduces the monthly burden by spreading out the repayment over a more extended period. This results in a smaller EMI for a shorter duration.

3. Credit Score

Your credit score is a crucial determinant of both the loan amount you can apply for and the interest rate you will be charged. Actually, your credit score reflects your overall financial health. In particular, it takes into account factors such as income, repayment behavior, existing debts, and borrowing history.

A higher credit score indicates a higher repayment capacity and a sense of financial responsibility. Lenders are more likely to offer personal loans with lower interest rates to individuals with higher credit scores.

4. Existing Debt

While having existing debts is not a major issue, having multiple loans when applying for a personal loan can pose a challenge. Lenders, especially for unsecured loans, may hesitate to provide you with another loan.

Moreover, if you delay making payments on your existing debts, it can negatively impact your credit score. Money lenders also evaluate the debt-to-income ratio, which measures the proportion of your income dedicated to debt payments. A higher ratio reduces the chances of obtaining a loan, even if you have a substantial income.

5. Employer's Status

Lenders consider the status of your employer as an additional factor when evaluating loan applications. Since personal loans are generally unsecured, a stable and reputable employer indicates a lower employee turnover rate. Apart from that, it enhances the borrower's chances of timely repayment.

6. History of Defaults

Lenders may penalize borrowers with a higher interest rate or even reject their loan applications if they find defaults in their credit history. Maintaining a good credit history and ensuring timely repayments is essential to secure favorable interest rates.

7. Age of the Applicant

Applicants above the age of 60 may find it challenging to obtain a loan due to the perceived decrease in income stability upon retirement. Conversely, individuals with a stable income have an easier time securing loans, often at lower interest rates.

8. Negotiation Skills of Borrowers

Building a long-term relationship with a particular bank can work in your favor when seeking a loan. Maintaining a good relationship and demonstrating loyalty can provide leverage for negotiating favorable interest rates and fees. While you may not always secure the lowest rates, banks are often willing to reduce them to some extent to retain loyal customers.

9. Economic Climate and Market Factors

External economic factors such as repo rates, inflation, and recessions also impact personal loan interest rates. During inflation, lenders charge higher interest rates, whereas, during a recession, rates tend to be lower.

Additionally, lower repo rates set by the central bank often translate to lower interest rates for personal loans. While you may have limited control over these factors, it's advantageous to consider taking a loan during a low-interest period.

Calculating Personal Loan Interest

To calculate your personal loan interest, you can use the following formula:

EMI = P x R x (1+ROI)^N / [(1+ROI)^N-1])


P represents the principal loan amount

N is the loan tenure in months

ROI denotes the monthly rate of interest, calculated by dividing the annual rate of interest by 12 and then by 100

By plugging in the values, you can determine your Equated Monthly Installment (EMI) and have a clearer understanding of your loan repayment obligations.

Final Thoughts

Several factors influence your personal loan EMI and interest rates. Understanding these factors and using tools like online loan EMI calculators can empower you to make informed decisions. Also, it helps you manage your finances effectively, and ensure a smooth repayment journey.


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