With options like zero collateral, quick disbursal and no restriction on the usage of funds, personal loans come in handy for meeting financial shortfalls. However, there are numerous myths associated with personal loans. These myths even cause potential borrowers to refrain from applying for it.

So are you interested in a personal loan? But are scared of all the myths surrounding it? Be sure to get your facts straight first. Because you may have a home repair you can’t cover. Maybe your car needs work. No matter the reason, it is no harm in considering a personal loan when you need cash.

With a personal loan, you’ll generally get a lower interest rate than you’ll find with a credit card. A personal loan can also help you in building your credit history and score if you pay it off on time.

In this article, we list out some of the common personal loan myths that you shouldn’t believe.

Myth No. 1: Personal loans involve long processing time

Borrowers often hold back from applying for a personal loan assuming it involves longer processing time and a lengthy approval process. But being unsecured in nature with no requirement for security, personal loans are usually disbursed within 2-7 working days of submitting the loan application also with minimal documentation. Some lenders even disburse instant personal loans within the same day.

Myth No. 2: Low credit score means loan rejection

Although credit score is one of the important factors considered by the lenders to weigh your loan application, having low credit score does not necessarily mean outright loan rejection. There are chances that lenders may still approve your personal loan application on the basis of other eligibility factors such as your annual income, job profile, employer’s profile, etc.

However, always remember that the interest rate charged in case of those with low credit scores is likely to be higher than those with higher credit scores. So, we highly recommend that you seek the help of professional credit repair services like CreditMantri to help you boost your credit scores and improve loan eligibility.

Myth No. 3: Banks are the sole lenders of personal loan

Borrowers assume that only banks offer personal loans and as a result, they miss out on NBFCs or digital lenders when banks turn down their personal loan application. While NBFCs and digital lenders usually charge higher interest rates, they have relaxed loan eligibility and speedy approval process than banks.

Myth No. 4: Rate of interest of personal loans is high

Personal loans are often considered a costly credit option because of their interest rates. Anyway, this holds true mostly in case of those with poor credit profiles. Some lenders offer personal loans for as low as 10.5{9f33fa6374e3accb9fcd2b17ca9633f0166fc5a757305eb8139718b6c4c0be1d} p.a. to those with a good credit profile.

Broadly speaking, it doesn’t make sense to compare personal loan interest rates and interest rates of other retail loans like home loans, car loans and gold loans using the same factors. This is because personal loans are unsecured while the latter are secured. Unsecured loans have a higher interest rate compared to secured loans to offset the risk borne by the lender.

When compared with other unsecured borrowing options like loans against credit cards and credit card EMIs, the interest rate of personal loans is lower. 

Myth No. 5: Those with existing loans are not eligible for personal loan

Banks and NBFCs consider repayment capacity of a loan applicant while evaluating loan application. Usually, lenders opt to lend to those having EMI/Income ratio of up to 60{9f33fa6374e3accb9fcd2b17ca9633f0166fc5a757305eb8139718b6c4c0be1d}. This ratio is the proportion of one’s monthly income used for servicing existing EMIs as well as the EMI of a new loan.

Some lenders may use net monthly income while others use gross monthly income for calculating the ratio. Thus, those having existing loans with adequate repayment capacity to service a new loan should be eligible for it, provided they meet other eligibility criteria set by the lender.

Myth No. 6: All personal loans come with prepayment charges

Banks and NBFCs offering personal loans on fixed interest rates can penalise foreclosures and part-prepayments. However, there are lenders who do not penalise prepayments despite offering loans on fixed rates. Loan foreclosure or part-prepayment charges can go up to 5{9f33fa6374e3accb9fcd2b17ca9633f0166fc5a757305eb8139718b6c4c0be1d} of the outstanding principal or part-prepaid amount accordingly.

Remember that there are some lenders who do not allow part-prepayments of personal loans whereas others allow part-prepayments only after the repayment of a predetermined number of EMIs.

Lenders offering personal loans on floating interest rates cannot levy prepayment charges because the RBI has barred lenders from charging prepayment penalties on floating rate retail loans.

Myth No. 7: A personal loan won’t work in an emergency

When emergency situations arise, you would like money as soon as possible. You might assume a personal loan is out of the question. You might imagine it takes weeks to get the loan approved and receive the funds.

Well that’s not the case. In fact, in most cases, you’ll get your personal loan funds within a couple of days of applying. It’s definitely an option in an emergency. Granted, a personal loan will never be as fast as swiping a credit card on the spot but these loans can move very quickly.

Myth No. 8: You need a good reason to get a personal loan

When you apply for a home loan, you must use your loan proceeds to buy a home. When you apply for a car loan, that cash can only go toward the acquisition of a car. But with a personal loan, you can borrow money for any purpose. Honestly, there doesn’t have to be a good reason for it. If you want to borrow some amount to go shopping and your credit score renders you eligible for a personal loan, then you have every right to do so (though that’s certainly not recommended).

Myth No. 9: You can’t get a personal loan if your credit is poor

When you apply for a home equity loan, your owned property is used as collateral to secure the loan. Your lender could force your home into foreclosure if you fall behind on payments. With a personal loan, there’s no particular asset securing your loan. Your lender will likely reference your credit score to determine whether to approve you or not. And the higher your score, the more chances of you getting a personal loan.

But that doesn’t mean you’re completely out of luck if your credit score needs work. In fact, there are specialized personal loans for poor credit available. Of course, the lower your credit, the higher you can expect your personal loan interest rate to be — but it’ll still likely be less than what a credit card will charge you.

Now, that we’ve debusted the myths of personal loans, you can go ahead and apply for one confidently armed with the right knowledge. Check out CreditMantri to find the best personal loans matched to your credit profile. Evaluate the features of different loan offers and pick the best one that works for you.