Many people for fulfilling different types of needs take personal loans. One feature of personal loans that makes them quite demanding is that there is no specific purpose attached with these loans. Unlike home and car loans that are taken for purpose of buying home and care respectively, amount of personal loan can be utilized for home improvement, medical treatment expenditure, college tuition fee etc.
Repayment of persona loan comprises of principal amount repayment as well as interest repayment. Rate at which interest is applied in personal loan account is called as personal loan interest rate. Personal loan interest rate depends upon many factors.
First factor is the amount of collateral or security. Personal loans are provided as secured loans as well as unsecured loans. Personal loan interest rate decreases when a person provides security like home against the loan amount. If there is no security or collateral, interest rate would definitely be higher. Most of people like to get unsecured personal loans by paying higher interest rates as there is no fear of losing any asset. However, loan amount in case of secured personal loan is larger than loan amount provided under unsecured personal loan.
Second factor that affects interest rate is credit score of a person. In countries like United Kingdom and United States, credit rating or credit score of a person affects personal loan interest rate in a great manner. In case of excellent or good credit scores, interest rate applied is low. If credit rating is fair or bad, higher interest rates are applied. Some personal loans like payday loans, cash advance loans, etc that attract highest personal loan interest rates. In these loans, a person can be required to pay interest at a rate of 350% or even higher.
Third factor that affects interest rate attached with personal loans is the repayment period. Short repayment periods attract low personal loan interest rates and higher monthly payments. Longer repayment periods attract high interest rates and low monthly payments. Since interest rates are among highest interest rates, a person should try to repay the personal loan as soon possible.
Apart from above, there are some other factors too that affect the interest rate on personal loans. If a person obtains personal loan from a bank that has already issued a credit card, interest rate may be lower. Similarly, in cases where personal loans are provided under special financing to particular company or organization, low personal loan interest rate can be applied in loan accounts. Some financial institutions apply personal loan interest rate based on scores obtained by a person in scoring models. These models include different parameters like monthly income, outstanding debts, qualifications, type of employment etc.
Generally, self-employed people are provided loans at higher rates. It has also been observed that online lending institutions are able to provide finance at lower interest rates as compared to traditional lending institutions. If a person has taken payment protection for personal loan, he is able to get amount at low interest rate. This type of facility is quite popular in United Kingdom where a person can secure personal loan repayment by getting payment protection.
Since personal loan interest rate vary from one lending institution to another, it is better if a person goes for shopping of these rates. For comparing interest rates, a person is required to provide information like amount of loan needed, repayment period sought, monthly income etc. Many online sources specialize in providing interest rates of all the leading lending institutions in an area. For example, a person living in United Kingdom can easily log on to Money Extra for getting interest rates of leading lenders in UK that provide personal loans. Currently, online personal loan interest rates applied by various institutions are as follows:
Your Personal Loan applies interest rate at 6.9% whereas MB bank applies interest rate at 7.2%. Alliance Leicester is one of leading financial institutions United Kingdom and applies interest rate at 7.7%. Halifax charges 7.8% personal loan interest rate whereas Abbey charges 7.9%.
All interest rates mentioned above are as applied on personal loan of 10000-pound sterling and taken for a period of 5 years.
While searching for best interest rates, a person should not get swayed by high loan amount offers provided by lending institutions. This is because while providing big amounts, such institutions not only charge high interest rates but also charge high fee and other charges.
One type of personal loan that should be discussed is Top-Up-Loan. This type of loan attracts one of lowest interest rates in market. It is an additional loan amount provided to a person who has already taken a home loan. There is no restriction put on use of personal loan amount and personal loan interest rate applied is the same as is applied on home loan account. Such loans are provided by home finance companies. Many people take this type of low interest rate finance for meeting expenses relating to education or for buying home durables. It is important to understand that interest rate charged by most of lending institutions in present times vary from 12-20% whereas Top-Up-Loan can be taken by a person at 7-9% interest rate. Maximum loan amount that can be availed depends upon the tenure of home loan remaining, record of accomplishment of a person etc. In most of cases, a person is able to get from 20-30% of existing home loan as top up loan.
It is advised here that for getting low personal loan interest rate, a person should not provide home as security for loan amount. This is because non-repayment can result in foreclosure of home.