Personal loans can be an excellent financing option when you need funds for major expenses or emergencies. However, you may often come across common personal loan myths and misconceptions surrounding these loans, leading many to form unfavourable opinions. By getting the facts straight on some prevalent personal loan myths to ignore, you can make an informed decision when applying for one.
Myth 1: Personal Loans Have Excessively High Interest Rates
A common misconception about personal loans is that they always have sky-high interest rates. While rates are generally higher than those of home or auto loans, they have reduced considerably over time. Interest rates now range from 10% to 40%, depending on your credit score, income, employment stability, and loan amount.
Banks and NBFCs offer competitive interest rates to attract low-risk borrowers with good credit scores above 750*. You can negotiate further by comparing rates across financial institutions. So, while relatively higher than secured loans, personal loan interest rates need not always be exorbitantly high.
Myth 2: Applying for Too Many Loans Reduces Your Chance of Approval
Another prevalent personal loan myth is that applying for loans across multiple banks reduces approval odds due to hard credit inquiries. However, experts note that applying for fewer than 6-7 personal loans in a six-month window has only a minor impact on your score.
Banks check credit reports to ascertain risk and gauge income stability. If you have a high credit score despite multiple inquiries, it signals financial discipline. Also, banks cannot reject loans solely based on inquiries without assessing income, obligations, borrower behaviour, etc. Hence, rejections usually depend on repayment capacity and risk factors.
Myth 3: Personal Loans Are Only for Salaried Professionals
There are common misconceptions about personal loans that only salaried applicants qualify to take out these loans. The reality is that both salaried and self-employed individuals can take out personal loans.
In recent years, many banks and NBFCs have designed personal loan products tailored specifically for the self-employed, business owners and working professionals from various industries. The eligibility criteria and document requirements are also more flexible now.
So, you can apply for a personal loan if you are self-employed, a professional, a businessman, or a salaried employee if you meet the income eligibility criteria.
Myth 4: Personal Loans Have a High Risk of Rejection
Personal loans have an erroneous reputation for high application rejection rates. However, the average rejection rate for personal loans has dropped considerably in recent years.
With flexible eligibility criteria regarding income, employment type and varied documentation options, personal loan approval is more accessible nowadays. Also, financial institutions use credit algorithms that consider several applicant parameters beyond credit score alone for approval decisions.
So, healthy financial behaviour reflected through income stability, credit mix, spending patterns, etc., signals lower risk and increases approval odds. Hence, unless you have bad credit behaviour, personal loan rejection chances are moderate to low currently.
Myth 5: Credit Cards Are Cheaper than Personal Loans
Since credit cards offer 45-to-50-day interest-free periods, a common misconception about personal loans is that funding through credit cards is more economical. However, relying on credit cards for long-term debt is risky and expensive compared to personal loans.
Moreover, rolling over credit card balances attracts recurring interest charges ranging from 36-42% per annum. Even minimum amounts due on cards have interest components that augment your principal. On the other hand, personal loans have structured EMIs, enabling faster debt clearance.
So, using credit cards for long-term financing often becomes far more expensive than taking out a personal loan unless you repay within interest-free periods.
Summing Up
Many people have mistaken ideas about personal loans, but they've changed significantly in recent years. They now come with fair interest rates, personalised deals, and transparent costs. Whether a salaried individual or self-employed, personal loans can help you meet your financial needs. By ignoring personal loan myths and seeking accurate information, you can make better borrowing decisions and get the right support from banks and other financial institutions.
