How to get a low interest rate on a personal loan

At some point or the other, all of us will either apply for a personal loan or consider applying for one. This is because taking a personal loan is one of the best ways to get the money required to meet financial requirements.

From weddings to medical emergencies, personal loans can be used for a number of purposes. And since these loans are unsecured loans that require no collateral, they are sanctioned relatively quickly. Moreover, these loans have short tenures that range up to 5 years. This means that you can not only meet your financial requirements, but you can also be debt free relatively faster.

Probably, the only downside when it comes to personal loans is the high rate of interest that is charged. Since these loans are unsecured and their approval is based on factors such as credit and income checks, banks are taking a risk when they lend personal loans. As a result, the interest charged is quite high, especially when compared to other loan products. Currently, personal loan interest rates range from around 10% p.a. to 15% p.a.

This being said, there are ways to get a personal loan at a lower than advertised interest rate. Here’s how.

1. Maintain a good CIBIL score

When it comes to unsecured loans, your CIBIL score plays a very important deciding factor in terms of approval of the loan and the interest rate you are charged.

This score is a 3-digit numerical summary of your credit history. It lets the bank or the lender know if you are creditworthy or not. So, it takes into consideration the number of active credit cards and loans you have and if you have defaulted on payments, among other factors.

A CIBIL score above 700 is considered to be a good score while a score of 750 and above is considered to be an excellent score.

If you have an excellent score, you are in a position to negotiate a low interest rate. This is because banks know that they will not be risking money if they lend to you. Moreover, banks are also businesses which require customers. As such they would rather have a customer with a high CIBIL score who is sure to repay their loan at a low rate of interest than one who defaults on their payments.

2. Maintain a good relationship with the bank

In a country like India, banking with one particular bank goes a long way in building a relationship and establishing trust. If you have several banking products with a particular bank and have always made sure that you have made your payments for previous loans on time, the bank may offer you a lower rate of interest. In fact, some banks even advertise lower rates of interest for their preferential customers.

The bottom line is, it doesn’t matter if you think that your bank doesn’t offer lower rates of interest to its customers. If you have been banking with them for a long time, chances are they will offer you a lower than advertised rate on your personal loan if you talk to them.

Even if the bank doesn’t reduce the interest rate offered, they could waive certain fees such as processing fees that are applicable on your loan.

3. Pledge an asset

The attraction of a personal loan is the fact that it is unsecured. However, some banks will offer you a lower rate of interest if you provide an asset as collateral. This could be property, shares, fixed deposits, or life insurance policies. The only condition is that the value of the asset must be equal to or greater than the loan amount.

While some banks advertise secured personal loans at low rates of interest, others don’t. If you have an asset that you can pledge, a good rule of thumb is to ask the bank if providing the asset as collateral will lead to a lower interest rate.

4. Increase your income

This cannot guarantee you a reduction in the rate of interest offered, but it could be a deciding factor. Banks are more likely to offer you a lower rate of interest on your personal loan when they know that you can repay it comfortably.

If your employer isn’t willing to increase your income, consider supplementing your income with a second job (if possible).

5. Look for tenure-based discounts and festive offers

Sometimes, banks tend to offer tenure-based discounts on interest rates. So, you may find that particular loan tenures have a lower rate of interest than others.

Also, consider taking advantage of festive offers. To attract new customers, most banks offer loans at attractive rates of interest during a festive period. You will find that interest rates on personal loans are usually lower during festivals such as Diwali and New Year’s. So, applying for a personal loan during the festive period is a good idea.

6. Check if your employer has a tie-up with a particular bank

Most large multi-national companies partner with a bank for all of their needs. So, each time a person joins the company, a salary account is opened with the partner bank. Since the company provides business to the bank, the bank in turn provides concessional rates to the company’s employees.

If you are in the market for a personal loan, consider checking with your employer if they have any tie-ups with a bank. This could help you get a loan at a lower rate of interest.

7. Do your research

As always, do your research. The bank with which you have a salary account or your savings account, may not always offer the best interest rates. And while it is difficult to go from one bank to another making enquiries or checking websites of several banks, there is a simpler way to find out the various interest rates available for personal loans.

You can always use a loan comparison site such as BankBazaar to determine which bank or lender offers the lowest interest rate on personal loans.

At the end of the day, it is important to keep in mind that there is nothing wrong with negotiating a lower rate of interest. You probably do it all the time when you make small purchases and call it bargaining, so there really isn’t any reason why you shouldn’t do it when it comes to a personal loan. Especially, when there are tried and tested ways to help lower the interest rate charged on your personal loan.