Applying for a personal loan may seem daunting if you are a first-time borrower. For example, you might think it involves a long process and high-interest rates, or that securing a loan requires provisions of collateral. Maybe you’ve heard horror stories about unscrupulous lenders and ridiculous payment terms that have deterred you from getting the help you need.
Myths about personal loans can discourage people from pursuing the option. The truth is that personal loans can be lifesavers to people in various financial situations, and most of the time, those horror stories hold no water.
We’ll look at ten of the most common myths, misconceptions, and lies about personal loans so you can make your decision based on the facts.
1. Applying for a Personal Loan Is Difficult and Complex
In reality, it’s much easier to be approved for a personal loan than for a car or home loan. You can apply online for a personal loan and receive a decision quickly, often within a few hours or even a matter of minutes.
The process has been simplified so you shouldn’t need assistance to apply. But if you want help, you can contact the lender’s customer service team.
2. Only Banks Offer Personal Loans
Many people mistakenly believe that banks are the only financial institutions offering personal loans. Actually, several non-banking financial companies (NBFCs) also offer personal loans.
Banks often have extremely rigid criteria an applicant must meet to have a chance at approval, so applications are regularly rejected. And many people are put off from applying elsewhere once they’ve been rejected by a bank.
But many credible financial institutions offer all types of personal loans at interest rates similar to banks’, often with more customizable features and extras. So if a bank has rejected your loan application, do your research and check out some of the other financial institutions that offer personal loans with much less red tape.
3. You Cannot Get a Second Personal Loan
Some people think they cannot get a second personal loan if they are still paying back their first personal loan. In reality, a second personal loan is sanctioned using the same criteria as a first one, which means that having the existing personal loan in place doesn’t affect the eligibility to receive the second one. That said, depending on your income, cash flow, and existing liabilities, your lender will assess your repayment capacity.
4. Personal Loans Take a Long Time to Process and Payout
In many cases, borrowers refrain from applying for a personal loan because they believe it involves a long and tiresome approval process. This may have been true in the past, but that is not the case today.
Applicants can fill out the application online and upload the required documents, which takes only a few minutes and is mobile-friendly. If approved, your loan can be disbursed within 12 to 24 hours from the time you clicked “apply.”
Personal loans are one of the fastest, hassle-free ways to get that extra money you need for urgent situations and purchases.
5. Bad Credit Scores Result in Loan Rejections
A low credit score may impact the result of your loan application, but this does not guarantee a rejection. Although it is an essential factor, lenders also consider other factors, such as age, income, income to debt ratio, and if your credit score has been improving recently.
When deciding whether or not to approve a loan, lenders mainly assess the applicant’s capacity and intent to repay the loan. So if you’ve adopted more responsible behaviors and your credit score is benefiting from them, you’ll likely have a better chance at approval even if your score is still on the low end. And of course, do your research, because credit policies and eligibility criteria vary from lender to lender.
6. The Interest Rate on Personal Loans Is Always High
People commonly believe personal loans come with very high-interest rates because they do not require collateral. But, realistically, interest rates vary from lender to lender and are often determined by an applicant’s credit profile.
Also, personal loans are available at much lower rates than credit cards, with annual interest rates typically ranging from 16% to 24%. In addition, there’s no need to pledge collateral or block an asset, making personal loans a more attractive deal.
7. Collateral Is Required for Personal Loans
As mentioned above, no collateral is needed for most personal loans. Also, since they’re unsecured loans, they don’t require a lot of documentation and can be processed quickly. It’s important to remember that personal loan providers are there to make the lending process as trouble-free and convenient as possible.
8. Personal Loans Are Only Available to People Who Earn Salaries
Many people assume personal loans are only available to salaried individuals with steady incomes. Traditional and overly formal banking regulations are mostly to blame for this myth.
But, as mentioned, forward-thinking modern lending solutions consider the bigger picture regarding payback eligibility. For example, self-employed professionals and business owners can also obtain personal loans because, when determining creditworthiness, your borrowing capacity and ability to service the loan regularly are more important criteria than your profession.
9. There Is No Prepayment Option for Personal Loans
Some potential borrowers think that they would not be able to repay their personal loans before the loan tenure is over. But, prepayment options are certainly available despite the shorter terms of most personal loans.
Banks may charge a small fee for early repayment, but digital lenders these days usually just require a minimum duration for making monthly installments (EMIs). As a result, borrowers can foreclose their loans at no additional charge after completing the minimum tenure, likely a matter of a few months.
10. Your Debt Burden Will Increase if You Take Out a Personal Loan
The misconception is that a personal loan will make your financial burden heavier if you already have existing debt.
But, if you refinance your debt with a personal loan, you can consolidate it, including multiple loans and credit cards. This way, you only pay one monthly installment – and likely at a lower interest rate than you’d been paying on individual debts like credit cards. Plus, with just one monthly payment, your financial planning gets much easier.
Many people have at least a few misconceptions about personal loans, but the truth is they’re super convenient and hassle-free. So don’t let yourself get bogged down in the myths, and explore how a personal loan could benefit you and your family.