Personal loans can definitely be a saviour during financial emergencies. Many people opt for this credit facility to meet their monetary needs. However, there are still some people who consider it a dangerous bet. That is because personal loans are surrounded by many myths.
Let’s bust all the myths associated with personal loans!
A low credit score can lead to loan rejection
It is one of the biggest myths among many borrowers that having a low credit score can result in the personal loan application rejection. While your credit score is a crucial eligibility factor considered by lenders when you apply for a Personal Loan Online or offline, there are other factors too that are more important than a low credit score.
Banks and other financial institutions look for borrower’s income and repayment capacity along with their credit score. Nowadays, many online lenders and app-based personal loan providers don’t give much importance to credit score. However, the rate of interest applicable on a personal loan with a low credit score is usually higher.
Personal loans come with high interest rates
Many borrowers believe that personal loan interest rates are very high. However, it is not always true. Lenders set rates of interest based on the borrower’s credit score and repayment capacity. Individuals with a low repayment capacity are usually offered loans at a higher interest rate, whereas borrowers having a good CIBIL score and good repayment track record can get a low interest rate.
Personal loans can only be used for personal reasons
A personal loan is one of its kind multipurpose and collateral-free loan. It can be used for all your financial needs. Once you get a personal loan, there is no restriction on its usage. You can use this loan for personal expenses as well as business-related needs. Several business owners avail personal loans for managing their working capital requirements.
Personal loans are only offered by banks
This is another common misconception revolving around personal loans. Many individuals assume that only banks offer personal loans. That is not true. Apart from banks, many Non-Banking Financial Companies (NBFCs) and digital lenders offer personal loans. In many cases, when banks reject the personal loan application of an applicant, NBFCs and digital lenders accept their loan applications since their eligibility criteria are more flexible than banks.
People having existing loans are not eligible for a personal loan
Lenders consider the repayment capacity of the applicant while evaluating their loan application. Usually, lenders prefer customers with an EMI/NMI ratio of up to 60%. This EMI/NMI ratio is the proportion of the applicant’s net monthly income used for repaying existing EMIs and the EMI of the new loan. While some lenders use net monthly income, others use the gross monthly income for this ratio calculation. Thus, if you are having existing loans and also have adequate repayment capacity to service the new personal loan, you can be eligible for it, subject to meeting other eligibility criteria set by the lender.
Only salaried individuals are eligible for personal loans
Many individuals believe that only salaried individuals with a steady flow of income are eligible for personal loans. This is yet another myth. Although salaried individuals have higher chances of getting their loan application accepted due to their regular monthly income flow, self-employed individuals can also avail of personal loans without a hassle. The approval of the loan amount is decided based on the borrower’s credit history. However, the loan amount sanctioned may vary.
You cannot prepay personal loans
Many people assume that being a short-term loan, you cannot prepay a personal loan before the end of the tenure. It is just a misconception. Borrowers can easily repay the loan amount just like any other loan before the end of the tenure. Most lenders set a period within which individuals cannot make a prepayment. This period may vary from 6 to 12 months. If you are paying your EMIs timely during this period, you are allowed to prepay your loan in part (up to 25% at a time) or full. This facility comes with a prepayment fee which may vary from lender to lender.
The personal loan approval process is time-consuming
In this digital era, this myth holds zero value. Almost every lender allows you to apply for a personal loan online with a few clicks. In this data-centric age, all vital information, including the credit records, cash flow, income, existing loans, and credit score of the borrower, is already available in the public domain and is readily accessible by lenders for scrutiny and evaluation. This availability of the required information makes loan approval almost instant. In many cases, you get approval within a few minutes of documentation verification and the funds are disbursed into your account within a few minutes of approval.
We hope that after knowing the reality, you will be able to get a personal loan without any doubt in your mind.