Personal loans are a credit tool that can be used to finance most major purchases and expenses, from engagement rings to home repairs, often at a lower interest rate than paying with a credit card. Unlike credit cards, personal loans provide borrowers with a one-time cash flow. Then the borrowers pay back this amount, the so-called principal amount, together with the interest in regular monthly installments over the term of the loan, the so-called term.
Due to the advancement of technology, it takes less than ten minutes to apply for a personal loan on the internet, where digital lenders offer various types of personal loans. The entire process from application to payout takes less than a day and the loans are often customized to suit your needs.
As with any other financial decision, getting a personal loan involves several questions, such as:
- Which Lender to Choose?
- What type of personal loan to choose?
- How do I get a personal loan?
While answering these questions is important, it is equally important to break the myths surrounding personal loans first, as they can tarnish judgment as they seek answers.
Myths Related to Personal Loans
If you are a first time borrower, you may be nervous about taking out a loan. Obtaining a personal loan can be expected to be a time consuming process or involve high interest rates or collateral on your loan. There are numerous myths surrounding personal loans that often discourage individuals from getting a loan when they really need access to finance. Here is a list of ten personal loan myths.
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 a part of the financial institutions that offer credit, there are several Non-Bank Financial Firms (NBFCs) that offer personal credit.
In several instances where banks can refuse an applicant’s loan application due to rigid norms, NBFCs and other digital lenders often accept these borrowers’ applications at similar interest rates and with more customization.
2. Personal loans have a long processing time
Borrowers often forego applying for a personal loan, as this involves a relatively longer processing time and a cumbersome approval process. This may have been the case in the past, but it isn’t entirely true in 2021.
The entire process from applying for the loan to be paid out in your account can now be completed within 24-48 hours. One has to fill out the application online and upload the required documents, which takes just a handheld device and less than a few minutes.
3. Low credit means credit rejection
A low credit score can affect the outcome of your loan application, but it does not guarantee a rejection. While it is an important criterion for approval, lenders also take into account other factors such as: age, income, authenticity of documents, fixed obligation to income ratio, etc.
Credit policies and eligibility criteria may vary from lender to lender, but the main assessment for loan approval is your ability and intent to repay.
4. Personal loans cannot be used if you already have an existing loan
Several loan applicants believe that if they are already paying back an existing loan, they cannot get a personal loan. It does not, and the same criteria apply to sanctioning a second personal loan as the first.
You can apply regardless of whether you already have credit or not. Your lender will review your repayment eligibility application taking into account your income, cash flow, and existing liabilities.
5. Personal loans require a security
Personal loans are unsecured loans and do not require collateral and therefore require minimal documentation. This is also one of the decisive factors why processing a personal loan is quick and easy.
6. Only employees can apply for personal loans
It is a popular belief that only employees with a steady flow of income are eligible to apply for a personal loan. However, individuals and entrepreneurs can also take advantage of personal loans.
The credit decision is not determined by the profession, but by the individual’s ability to accept credit and the ability to service the loan on a regular basis.
7. Personal loans always have high interest rates
Because personal loans do not require collateral, they are believed to come with very high interest rates. In reality, the interest rate differs from lender to lender and often depends on your credit profile.
The interest rates are usually between 16% and 24% per year and are therefore significantly lower than available with credit cards. Additionally, you are not required to pledge any security or freeze any asset, which makes it a better deal if the exchange rate is a few hundred rupees.
8. Personal loans have no prepayment option
Another myth about personal loans is that the borrower cannot repay the loan amount before the loan term expires. Just because personal loans have shorter terms doesn’t mean that personal loans don’t have prepayment options.
While banks may charge a small prepayment fee, these days digital lenders typically only have a minimum term for which individuals must make the monthly installment payments (EMI). After the minimum term of three to six months, for example, borrowers can cancel their loan at no additional cost.
9. Taking out a personal loan will only increase your debt burden
This seems logical, because taking out a personal loan when you are already in debt only adds to your burden. However, you can refinance all of your debts including multiple loans, credit card debt through one personal loan, thereby consolidating all of your debts and paying only one monthly fixed rate installment that matches your cash flows.
10. It is difficult and complex to apply for a personal loan
Compared to a car loan or a home loan, getting a personal loan can be a much easier process. Applying for a personal loan these days is as easy as filling out an application online and waiting from a few minutes to a few hours for approval.
The process is so simple that you don’t need any help, but even if you do, you can contact a digital lender’s customer service team and get help right away.