A personal loan is a form of credit instrument that helps you finance most major purchases and expenses, from an engagement ring to home repairs, often at a lower interest rate than paying with a credit card. credit. Unlike credit cards, personal loans provide borrowers with one-time cash flow. Then, borrowers repay this amount, called principal, along with interest in regular monthly payments over the life of the loan, called the term.
Due to advancements in technology, it takes less than ten minutes to apply for a personal loan on the internet, where digital lenders offer different types of personal loans. The entire process from application to disbursement takes less than a day and loans are often customized to your needs.
As with any other financial decision, taking out a personal loan involves multiple questions, such as:
- Which lender to choose?
- What type of personal loan to choose?
- How to be eligible for a personal loan?
While it is important to answer these questions, it is equally essential to first dispel the myths surrounding personal loans, as they can cloud judgment in trying to find the answers.
Myths About Personal Loans
If you are a first-time borrower, you might be nervous about getting credit. It can be assumed that obtaining a personal loan is a time consuming process or involves high interest rates or the need to keep collateral against your loan. There are many myths associated with personal loans that often deter individuals from taking advantage of them when they really need to access finance. Here is a list of ten myths about personal loans.
1. Personal loans are only offered by banks
The most common misconception about personal loans is that banks are the only financial institutions that offer personal loans. While banks are one of the financial institutions that offer loans, there are several non-bank financial corporations (NBFCs) that offer personal loans.
In many cases, where banks may reject an applicant’s loan application due to rigid standards, NBFCs and other digital lenders often accept applications from these borrowers at similar interest rates and with more personalization.
2. Personal loans take a long time to process
Borrowers often refrain from applying for a personal loan on the assumption that it involves relatively longer processing time and a tedious approval process. This may have been true in the past, but it’s not quite true in 2021.
The entire process, from requesting to disbursing the loan to your account, can now be completed within 24-48 hours. One has to complete the online application and upload the required documents, which only takes a portable device and less than a few minutes.
3. A low credit score means loan refusal
A low credit score can impact the outcome of your loan application, but it doesn’t guarantee rejection. While this is an important approval criterion, lenders also look at other factors, such as: age, income, authenticity of documents, fixed bond to income ratio, etc.
Credit policies and eligibility criteria may differ from lender to lender, but for loan approval, they primarily assess your ability and intention to repay.
4. Personal loans cannot be used if you already have an existing loan
Many loan seekers believe that they cannot qualify for a personal loan if they are already paying off an existing loan. This is not true, and the same criteria are applied to sanction a second personal loan as for the first.
You can apply whether or not you have existing loans. Your lender will review your application based on repayment capacity taking into account your income, cash flow, and existing debt.
5. Personal loans require collateral
Personal loans are unsecured loans and do not require any collateral, which requires minimal documentation. It is also one of the key factors why processing a personal loan is quick and hassle-free.
6. Only individuals can apply for a personal loan
It is a common belief that only salaried people who have a steady income stream are eligible to apply for personal loans. However, individuals who are independent professionals and business owners can also qualify for personal loans.
Rather than profession, the credit decision is driven by the individual’s borrowing capacity and ability to repay the loan regularly.
7. Personal loans always have high interest rates
Since personal loans do not require collateral, it is assumed that they would carry very high interest rates. In reality, the interest rate differs from lender to lender and often depends on your credit profile.
Interest rates typically range from 16% to 24% per year and therefore are available at a much lower rate than credit cards. Plus, you don’t have to pledge any collateral or lock in an asset, making it a better deal at a rate difference of a few hundred rupees.
8. Personal loans do not have a prepayment option
Another myth about personal loans is that the borrower cannot repay the loan amount before the end of the loan term. Just because personal loans have shorter terms does not mean that personal loans do not have prepayment options.
While banks may charge a small prepayment fee, digital lenders these days tend to only have a minimum term for which individuals have to make monthly payments (MMIs). After the completion of the minimum term, say three to six months, borrowers can foreclose on their loan at no additional cost.
9. Taking a personal loan will only increase your debt
This seems logical because taking out a personal loan when you already have existing debt will only add to your burden. However, you can refinance all of your debts including multiple loans, credit card debts through a personal loan, consolidating all your debts and paying only one monthly payment at a fixed interest rate, this that suits your cash flow.
10. It is difficult and complex to apply for a personal loan
Compared to getting a car loan or a home loan, getting approved for a personal loan can be a much simpler process. Applying for a personal loan these days is as easy as filling out an online application and waiting anywhere from minutes to hours for approval.
The process is so simple that you don’t need any help, but even if you do, you can reach out to customer service at a digital lender and get help instantly.