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How bank decides the rate they should charge you while lending money to you

When you take any kind of loan, it comes with a cost, the price you have to pay to the money lender, it is called interest. Interest rates vary from time to time, people to people, type of loans to types of loans. Banks decide the interest rate to be charged to you on the basis of many things. The rate is based on the risk involved with you, the risk bank is taking for taking the loan, there is a basic concept of finance, higher the risk, higher will be the return (interest rate).

Here are some common things banks notice before sanctioning any personal loan so that you can maintain all of those points to reduce the rate of interest charged on you.

Your expected future income

If your expected future income is expected high, then the interest rate charged on your loan will be lower. Your future income and interest rate are inversely proportional to each other. As the salary increases, interest rate decreases. The reason for this is, if your future income is high, the cash you will have to repay the loan will be higher hence the chances of loan repayment will also increase.

The company for which you work for

All of the banks have a list of priorities, companies for providing loans. If you are an employee of that company then you will be paying lesser interest rate. If you are working in a smaller company you will end up paying extra interest rate. The reason for this is, if you are working for a bigger firm than chances of your defaulting are less. Because in small firms they consider that job security is less as compared to bigger firms.

Your past history with the same bank

Your past history with the same bank matters a lot. If in the past you have repaid your loans on time, then you are a trustworthy customer of the bank, hence you are less risky due to which they will charge you a lesser interest rate.

Your CIBIL score

Your CIBIL score matters a lot because it gives a summary of your past credit record, how you have repaid your past loans. If your CIBIL score is less, which means you have sometimes either delayed or not repaid any loan in the past. Lesser score says you are risky, due to which if your score is less bank will charge you high interest rate.

These were some common points, apart from these your negotiation capabilities, your relationship with the bank many more things matters.

 

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