Personal loans are among the most versatile debt instruments, and they can help alleviate immediate cash flow problems. These loans can be used for various purposes, such as wedding expenses, interior decoration, or even covering a delayed salary. While such loans may be a lifesaver to some, they come with a decent interest rate. As of February 2025, the interest rate at which banks can borrow from the Reserve Bank of India (known as the Repo Rate) has been slashed to 6.25%. This could indicate lower interest rates on personal loans for the end user.

Factors Determining Personal Interest Rates on Loans

Besides the repo rate, many personal factors that depend on the borrower can impact the interest rate of a personal loan. 

  • Credit Score and Credit History

The borrower’s credit score (also known as CIBIL score) and overall credit history are essential in deciding the interest rate on personal loans. To check the borrower’s credit history, a bank or non-banking financial company (NBFC) performs a soft inquiry.

Depending on what they find, the lending institution can decide what interest rate to offer the borrower. If your CIBIL score is 750 and above, the bank will likely provide you with a more attractive interest rate. Sometimes, banks may even offer you a pre-approved personal loan if your credit history is impeccable.

  • Income and Employment Stability

It goes without saying that individuals with a proven stable income are more likely to get better interest rates and overall loan repayment terms from a bank. When a lending institution finds that your income and employment stability meet all their eligibility criteria, your personal interest rates for loans are likely to be reduced.

On the other hand, self-employed people or those who work temporary gigs may be offered higher interest rates simply because their income is unstable. However, if you can prove that your income has been stable over time despite being self-employed, some banks may consider offering better interest rates.

  • Loan Amount and Tenure

The interest rate of a personal loan may also depend on the amount and tenure of the loan. Loans of lower value taken for a shorter tenure, such as microloans, usually come with a higher interest rate. Conversely, a pre-approved personal loan with a longer tenure offered by a bank may come with a lower interest rate.

However, you should always enquire beforehand whether such a loan can be foreclosed in the future. This is because there are many benefits to foreclosing loans with longer tenures.

  • Relationship with the Lender

Having close relations with the bank may also help you get a better interest rate on personal loans. This happens if you have already taken out loans from the same bank earlier and have a verified track record of repaying them aptly.

This type of customer loyalty is often rewarded by banks and other NBFCs in the form of reduced personal interest rates on different types of loans.

  • Type of Lending Institution

The type of lending institution also has an impact on the rate of interest for personal loans. Traditional banks usually have a rigid process for processing and disbursing loans, involving different levels of verification and paperwork. Whereas, NBFCs that operate digitally can offer loans much quicker without any paperwork.

Even though such NBFCs can more readily offer pre-approved personal loans, their interest rates are usually much higher. On the other hand, traditional banks may offer you more competitive interest rates.

Conclusion

Personal loans are now readily available and have become a popular way for many people to tide themselves over cash flow constraints. Their interest rates are dependent on several factors related to both the borrower and the lender. If you meet all the eligibility criteria for such personal loans, you may be offered a pre-approved personal loan. On the other hand, if you have had a working relationship with the bank or NBFC, this, too, might help you get more attractive personal interest rates on different types of loans.