Decoding Myths Around Personal Loans

Most people frequently turn to personal loans whenever there are any unforeseen expenditures or payments that might arise. For many expenses that need immediate money, personal loans are an appropriate solution.

As opposed to home loans and vehicle loans, which have a specific purpose, personal loans can be used for any purpose, making them a highly preferred form of finance for many people. In addition, personal loans are also unsecured loans because the borrower is not required to pledge any assets as security for the amount of the loan.

While the popularity of personal loans has grown rapidly over the past few years, there are still many myths surrounding this debt product that makes some people wary of approaching a lender. Here are some common myths about personal loans and the reality.

Myth 1: Only Banks Offer Personal Loans

There is a common misconception that people can take personal loans only from the bank where they have a salary or savings accounts. This is not true. A prospective borrower can approach any bank or non-banking finance company seeking a personal loan. In fact, several new-age fintech startups have also emerged in recent years that provide personal loans.

Myth 2: Only Salaried People Can Take Out Personal Loans

Both salaried and non-salaried people—including self-employed individuals as well as entrepreneurs and business owners—can apply for personal loans, although lenders may use different parameters to approve such loans and levy different interest rates.

While salaried people may find it easier to avail a loan since they get regular salaries, anyone who can provide proof to the lender that they have a stable source of income and have repayment ability can borrow money.

Myth 3: Borrowers Must Submit A Collateral

Personal loans are unsecured debt products. This means these loans do not require the borrower to pledge any asset as collateral with the lender. This feature makes personal loans different from secured loans such as home loans or car loans, where the home or car purchased through the loan is kept with the lender as security until the loan is fully repaid.

Myth 4: Personal Loan Approval Process Is Lengthy and Complicated

On the contrary, the personal loan approval process is the quickest and simplest, making them ideal for emergency situations. Most lenders only a handful of basic know-your-customer documents such as age, identity and address proof along with income proof. Moreover, these loans are usually approved within hours and disbursed in as few as two-three days. In fact, many lenders provide pre-approval to their existing customers based on their salary, credit scores, financial transactions and other information. This makes it even easier for borrowers to get a loan quickly.

Myth 5: Personal Loans Carry A High Interest Rate

Since personal loans don’t require any collateral, lenders seek to minimize their lending risk by charging a high interest rate than secured loans such as home loans or car loans.

The interest rate on personal loans varies from lender to lender, and depends on several factors including the borrower’s income, repayment ability and credit score. If the borrower’s income is high enough to cover repayments and credit score is strong, many lenders do approve personal loans at low interest rates.

Myth 6: People Need A High Credit Score To Get A Personal Loan

The credit score, or the CIBIL score, is a three-digit number ranging from 300 to 900 and indicates the borrower’s creditworthiness. The higher the score, the better are the chances of getting a personal loan at lower interest rates and easier repayment terms. Credit scores of 750 and above are considered ideal for availing a loan. However, many lenders do offer loans to people with scores of 700-750, and even lower than 600, albeit at higher interest rates.

Myth 7: Borrowers Paying Off Existing Loans Can’t Get Personal Loan

This is another common myth among prospective borrowers. In reality, a person can take out multiple loans of different types as long as the total EMIs don’t cross a certain threshold. So, even if a person has a home loan or a bike loan, the person can still seek a personal loan if his or her income is high enough to cover all repayments. Of course, banks and NBFCs will thoroughly check a person’s existing loans before sanctioning a new loan.

Having said that, a person should avoid taking too many loans at the same time so as to minimize the risk of default.

Conclusion

Personal loans often prove useful to deal with a variety of financial requirements, from medical emergencies to overcoming a shortfall in festival shopping or during a family wedding. Taking out a personal loan is a quick and simple affair, as long as the borrower has adequate income to cover the repayment.

Most banks and NBFCs provide personal loans through an easy application process. And some lenders, such as IIFL Finance, make it even easier through an online process that can be completed within minutes. IIFL Finance processes personal loan applications in less than five minutes and grants loans up to Rs 5 lakh with flexible repayment options.