With quick approvals, no collateral requirement, no restriction on end use of funds and pre-approved offers, personal loans can be extremely helpful in bailing you out of a financial crisis. However, there are several misconceptions around personal loans, which often leads to people opting for more expensive or time-consuming means to meet their needs for urgent funds met.
Here are some of the most common myths around personal loans:
They involve long processing time: Many borrowers believe that personal loans involve long processing time and tedious approval processes. This isn’t true. Personal loans today are quickly processed with minimal documentation, especially if you go through the online route. Lenders today extend pre-approved offers and instant approvals which ensure loans are disbursed to consumers within a day. Also, since these are unsecured loans requiring no collateral, their documentation is much simpler.
Low credit score implies loan rejection: Credit score is one of the important factors considered by lenders while evaluating your loan application. Hence, they do have an impact on your loan approval chances. However, a low credit score does not necessarily imply outright rejection of your personal loan application. Even if your credit score is on the lower side, factors such as your income and repayment capacity can certainly come to your rescue. But the interest charged for the loan is likely to be higher for people with a lower credit score.
Banks are the only lenders: Another common myth regarding personal loans is that they can only be availed through banks. There are other financial institutions – NBFCs and digital lenders – too which offer attractive personal loans. Many borrowers assume that they do not have any other borrowing option when banks reject their personal loan applications. In many cases, the loan applications rejected by banks do get accepted by other lenders such as NBFCs because banks generally have a more stringent eligibility and loan approval criteria than them.
Interest rates on personal loans are high: Many borrowers are of the view that personal loans charge unfair interest rates. However, personal loan rates can go as low as 10.99% in case you have a strong repayment capacity and credit score. Lenders have been increasingly setting interest rates on loans depending upon the borrower’s credit score. If compared to other borrowing options such as credit cards, which come with a higher interest rate ranging between 18% and 48% a year, personal loans are a less expensive option, depending on the customer’s profile.
You aren’t eligible if you have an existing loan: Even if a borrower is already tied up with another loan, they can still apply for a personal loan. While approving your loan request, lenders judge your repayment capacity by computing your net disposable income after taking into account all repayments such as loan EMI and credit card payments. So, even if you have existing loans at the time of your personal loan application, your loan application may get accepted if your repayment capacity seems to be satisfactory to the lender.
No prepayment option: Due to their shorter tenures than other loan options, personal loans are believed to have no prepayment option during their tenure. However, this is a myth. Personal loans, like other loans, also have the option of prepaying, subject to a few terms and conditions along with a prepayment fee, if levied by the lender. With their loan tenures generally ranging between one and seven years, personal loan prepayment can help borrowers save on interest cost by prepaying whenever they have additional funds.
Online application is a tedious procedure: Many borrowers still visit branches of various lenders to avail personal loans. They do not apply for loans online assuming it is a tedious procedure. However, the reality is exactly the opposite. To finalise the best loan for themselves, a borrower has to visit various bank branches and other lenders to get the most suitable personal loan. This can prove to be a time consuming and tedious task. Online financial marketplaces are offering personal loans through their platforms, with the facility of instant loan approval and a paperless process, thereby saving time. Borrowers can visit these online marketplaces and compare rates among various lenders to choose the most suitable personal loan as per their needs and financial position. Today, you can compare, choose and apply for a personal loan online, saving a lot of time and effort.