5 Factors That Affect Your Personal Loan Interest Rates

Personal loans are one of the best choices in a monetary shortfall, especially if you’re not entitled or eligible for secured loans such as a loan against FD, loan against property, loan against gold, loan against shares/securities, loan against insurance policy, etc. Personal loan interest rates remain dynamic subject to various factors affecting the eligibility and loan amount.

The relationship with lenders, repayment history, existing debt, income levels, and credit score are some common factors influencing personal loan interest rates. Therefore, a bank will have different personal loan interest rates for different customers. Let's dive deep into understanding how these factors affect personal loan interest rates.

5 Factors Affecting Personal Loan Interest Rate In 2025

1. Credit Score

A credit score is by far the most comprehensive indicator of loan eligibility and the applicable personal loan interest rates. 

• The credit score is derived from various elements including the credit mix, age of credit, repayment history, missed/deferred payments, credit utilisation, and fresh enquiries for credit. 
• The higher the credit score, the higher the chances of getting a personal loan approved at the best interest rates. 

An individual with a credit score above 750 has a higher chance of getting a personal loan approved at lower interest rates. A person with a prime credit score, typically above 800, or more than 850 can qualify for a personal loan at the best possible interest rates. 

As an aware customer, you should always check your credit report at least once or twice every quarter to check whether all the credit enquiries are valid and whether the banks are duly reporting/updating the credit bureaus about the loan repayments and EMIs. You should contact the concerned bank NBFC or housing financier if you find any discrepancy in the credit report as it will take a couple of weeks to get it rectified. 

• A credit score in good shape can help you grab pre-approved personal loan offers at discounted interest rates. 
• People who have low or damaged credit scores also stand a chance to get a personal loan but the interest rates will be a little higher. 

We at MyMoneyMantra make sure that every customer gets the desired personal loan amount at the lowest possible interest rates, effectively enhancing their loan journey.

2. Income

The current income level is a key determinant in ascertaining the eligibility of a personal loan applicant and deciding the personal loan interest rates. The income becomes a dual parameter for the bank or the NBFC to decide on the quantum of personal loans and choose the best personal loan interest rate for you. 

A person can choose to disclose income from various sources to get a higher personal loan amount, that too at lower interest rates. For example, you can verify your salaried income through company-generated salary slips and can showcase additional income from freelancing or gig work through bank statements. The conclusive decision of the bank will be based on the net monthly income and you’ll be offered a personal loan at lower interest rates as high-income earners can ensure adequate and timely repayments. 

3. Debt to Income Ratio

Debt to income ratio is a financial parameter that helps in gauging the repayment abilities of an individual. You may be earning in lakhs, but your repayment abilities shrink if your 70-80% of monthly income goes into obliging existing debt obligations. Debt to income ratio is nothing but the proportion of your total monthly income that is designated for payment of EMIs, rents, utility bills, insurance premiums, credit card debt, household expenses, and other types of debt. 

• A debt-to-income ratio above 60% and beyond this range is considered poor as it diminishes your ability to service a fresh line of credit. 
• Most banks and NBFCs prefer to extend personal loans to people with a debt-to-income ratio below 40%. 

An individual holding a larger chunk of disposable income after clearing off monthly debt obligations, bills, rents and other periodic spends is better placed to get a higher personal loan at lower interest rates. 

4. Nature of Employment

A personal loan is designed to cater to various requirements of salaried professionals and self-employed personnel. 

• People working in organisations controlled by central government and state governments are given priority as they are less susceptible to job losses and events of defaults. 
• However, banks and NBFCs are now progressively offering personal loans to salaried customers with the improving ecosystem in private corporations. 
• People who are not on a regular payroll, engaged in freelancing activities, part-time work, and seasonal employment drives may find it difficult to get a personal loan. 

Lenders are a little uncertain about recovering the dues from people who are not on a regular payroll or don’t have a regular income stream that can sustain their finances, monthly debt obligations, etc. Banks may also offer concessions on personal loan interest rates, up to certain basis points if the customer’s company is listed within the bank’s database. 

5. Repayment Behaviour

Repayment history signifies the discipline of a borrower and the ability to handle various forms of credit. Missed repayments and delayed EMIs are red-flagged in the credit report as banks report these actions promptly to the credit bureaus. 

On the other hand, fulfilling all repayments on or before the due date enhances the credit profile to a large extent. Timely payments not only help improve the credit score, but a person becomes eligible for similar loan offers at better interest rates, low processing fees, relaxed terms of repayment, etc. 

Conclusion

An individual is solely responsible for building or damaging the personal finances and the credit score. You may find little difficulty in the beginning when you’re new to credit, but later on, the eligibility and applicability of interest rates depends on the credit score and your discipline to deal with the credit mix.