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Factors Affecting Loan Interest Rates in India

Sometimes, we need loans for big expenses like appliances, vehicles, or medical costs. Higher interest rates mean you pay more over time. But you can get better rates by understanding what matters to banks. Luckily, several factors within your control can lead to better interest rates on loans in India. Follow key tips that can save thousands on personal loans overall. This article breaks down how. 

1. Income

Your income level and employment stability are key factors that banks consider when deciding interest rates to offer. Specifically, they look for a reliable monthly income that provides the confidence to make loan payments. Generally, the higher and more steady your income is, the more likely you are to qualify for a lower personal loan interest rate. A stable full-time job and healthy earnings work in your favour by consistently repaying debts. Lenders reward higher incomes with competitive rate offers.

2. Credit Score

Your credit score gives lenders insight into how reliably you have repaid debts in the past. Scores of 750 or above are considered excellent, whereas lower scores indicate some history of missed or late payments. By improving a lower credit score – such as paying all bills on time, keeping credit card balances low, and resolving any errors – you can raise your creditworthiness and likelihood of being approved for loans with better interest rates. Maintaining good credit means better loan terms.

3. Defaults 

Any defaults on your credit history, such as missed payments, accounts sent to collections agencies, or defaulted loans, raise flags for lenders that you may be at higher risk. These past repayment problems show you have sometimes struggled to manage debts responsibly. Getting such issues resolved and keeping your recent repayment history clean for some time demonstrates good financial behaviour and can contribute to lowering personal loan interest rate.

4. Reputation of the organisation

Your reputation with a particular lending organisation or bank and the length of your relationship contribute to the personal loan interest rate you may qualify for. Established ties built up through years of positive banking and lending interactions lead to increased familiarity and trust. Being an existing, loyal customer with a solid history with the institution often means access to better rate deals and incentives that recently established clients may not receive. Seek loans where relationship bonds exist.

5. Repayment History 

Those with proven track records of repaying past debts in full and on time pose minimal risks to lenders. Strong repayment histories on previous loans, credit cards, and other liabilities directly contribute to access to lower interest rates. When repayment has been spotty, obtaining competitive rates is far more complicated.

6. Relationship with the Bank

Existing positive relationships with banks through past lending or long-term accounts often leads to preferential treatment. Loyal repeat customers demonstrably represent lower risks and better repayment prospects to institutions with their accounts in good standing. This leads directly to access to lower personal loan interest rate than may be offered to unfamiliar first-time borrowers.


Lenders determine interest rates based on how likely you are to repay the loan. Factors within your control, like income, credit rating, loyalty to the institution and repayment patterns, greatly sway what interest rate is reasonable for your situation.

With IDFC FIRST Bank, for example, you can get competitive interest rates at 10.75% and 50% off on processing fees on Personal Loans. So you can consider and optimise all the above factors where possible, and explore loan options that reward your hard work with rates that won’t break the bank!