A personal loan is a credit instrument that helps people finance expenses like renovating a home, financing a wedding, purchasing a durable consumer product, and more. For a first-time borrower, it might be intimidating to apply for an instant loan.
In addition, they might be worried about the complex loan application procedure, higher interest, or keeping their asset as collateral with the lender. However, personal loans are hassle-free instruments that can be obtained at lower interest and without collateral. Amidst these benefits, many people still have misconceptions about personal loans that often deter them from getting one. Read this article to dispel the myths about personal loans online.
1) Only banking institutions offer personal loans:
The first and foremost misconception that more than half population of India has is that banking institutions only offer personal loans. While banks are an integral part of the Indian financial system that offers personal loans, many other non-banking financial companies (NBFCs) grant personal loans.
If a banking institution rejects your personal loan application, you can opt for non-banking financial institutions. Usually, the eligibility criteria of these institutions are much more flexible than banks.
2) Only individuals with higher credit scores can get personal loans:
Although most lenders offer personal loans to individuals with higher credit scores, it does not imply that you can’t get an instant loan with a lower credit score. However, a low credit score can impact the personal loan amount and interest rate. Therefore, the lending institution performs a risk assessment whenever a person applies for a personal loan. Variables such as age, income, financial standing, employment stability, and more are checked.
The main idea behind conducting a risk assessment is to know if the applicant is financially able to repay the loan. If an applicant’s income and financial standing support this particular assessment, then their credit score might have a negligible effect on the approval of a personal loan application.
3) Personal loans can’t be availed of without collateral:
This is another misconception that most people have about an instant personal loan online. However, little do they know that personal loans are an unsecured form of credit instrument. Here unsecured means that there is no need for the borrowers to keep their assets as collateral with the lending institution to get a personal loan. Instead, lenders usually grant loans after conducting a risk assessment, which has nothing to do with collateral.
This myth can only be proven right in one circumstance- when an applicant does not meet the minimum eligibility criteria of a lending institution. In such a case, securing collateral from the borrower ensures the bank that the borrower will repay the loan on time. Collateral acts as a safety cushion for lenders in such situations.
4) You can’t avail of a personal loan if you have existing loans:
Numerous applicants believe they can’t avail of personal loans if they already have multiple loans. However, the same is not true. Online personal loan themselves provides the benefit of debt consolidation. You can get a personal loan from the lender to consolidate and repay your existing debt through credit cards or other loans. Therefore, no matter if you already have loans or debts, you can still apply for a personal loan.
However, a debt-to-income ratio of the applicant might support this particular point. A debt-to-income ratio tells if an individual’s current debts are greater than their monthly or annual income. For example, if an applicant’s debt-to-income ratio is more than 50%, then their personal loan application might be rejected.
5) Personal loans charge higher interest rates:
Now that personal loans don’t require collateral, many people assume that these loans charge higher interest rates. However, the truth is that interest rates on personal loans vary from lender to lender, and most times, it depends on the applicant’s credit profile. In India, interest rates on personal loans range from 10% to 25% per annum. Moreover, applicants do not need to pledge collateral to avail of personal loans at lower interest.
6) There is no personal loan prepayment option:
Another prevalent misconception about personal loans is that borrowers can’t repay the loan amount before the completion of repayment tenure. But the truth is something else. Just because personal loan repayment tenure is shorter doesn’t mean there is no loan prepayment option.
Often, lenders charge a small fee for the prepayment of personal loans. However, several banks charge no such fee. Even digital lending institutions offer personal loans at only a minimum tenure, for which borrowers can make monthly instalments to repay the loan amount. By following the competition of minimum loan tenure, say, 3 to 6 months, a personal loan can be foreclosed by borrowers at no additional charges.
7) Personal loans are granted to only the salaried class.
It is a common belief among people that only the salaried class is eligible for getting personal loans. The reason for this is that they have a steady flow of income. However, now that business people and self-employed professionals can have fluctuating incomes, it might seem that they can’t apply for personal loans online.
However, personal loans can be obtained by salaried class, business class, self-employed professionals, and even Non-Resident Indians. Lenders are usually interested in applicants’ credit scores and history, not what career they are pursuing. You can easily get a personal loan if you have a strong credit score and history.
Personal loans are the right choice when you have limited funds and want to finance your expenses or consolidate debt. However, before you apply for an instant loan, it is advisable to devote enough time and effort to conducting market research. Comparing different lending institutions and their loan policies will help you dispel all misconceptions about personal loans. In addition, you can choose the right personal loan plan offering maximum benefits at lower interest. Although personal loans are expensive and can be used as a risky financial instrument, they can be a great option for borrowers with poor credit scores or high-interest rate debts.