6 Common Personal Loan Myths You Should Not Believe
Posted by Tingyu
Numerous myths associated with personal loans refrain many from applying for them. Let’s look at some of these widespread misconceptions regarding personal loans.
With zero collateral, quicker disbursal and no restriction on the end usage of funds, personal loans can come handy for meeting immediate financial shortfalls. However, numerous myths associated with personal loans refrain many from applying for them.
Let’s look at some of these widespread misconceptions regarding personal loans:
Myth No. 1: Personal loans involve long processing time
Borrowers often refrain from applying for a personal loan assuming it involves relatively longer processing time and cumbersome approval process. But being unsecured in nature with no requirement for security, personal loans are usually disbursed within 2-7 working days of submitting the loan application, with minimal documentation. Also, some lenders claim to disburse instant personal loans within the same day.
Myth No. 2: Low credit score means loan rejection
While credit score is one of the crucial factors considered by the lenders to evaluate your loan application, having low credit score does not necessarily mean outright loan rejection. Lenders may still approve your personal loan application on the basis of other eligibility factors such as your disposable income, job profile, employer’s profile, etc. However, keep in mind that interest rate charged in case of those with low credit score is likely to be higher than those with higher credit score.
Myth No. 3: Banks are the only lenders of personal loan
Borrowers assume that only banks offer personal loans and as a result, they do not consider NBFCs or new age digital lenders when banks turn down their personal loan application. While NBFCs and digital lenders usually charge higher interest rate, they have relaxed loan eligibility and approval process vis-à-vis banks.
Myth No. 4: Rate of interest of personal loans is high
Personal loans are often considered as costly credit option. However, this holds true mostly in case of those with poor credit profile. Some lenders offer personal loans for as low as 10.5% p.a. to those with a good credit profile. Personal loan interest rate cannot be termed as too high given that it is not backed by any collateral or margin as in the case of home loan, car loan, loans against securities, or gold loan, etc.
Other unsecured borrowing options like loan against credit cards and credit card EMIs come with higher interest rate than personal loans for similar credit profile.
Myth No. 5: Those with existing loans are not eligible for personal loan
Banks and NBFCs consider repayment capacity of a loan applicant while evaluating loan application. Usually, lenders prefer to lend to those having EMI/Income ratio of up to 60%. This ratio is the proportion of one’s monthly income used for servicing existing EMIs as well as the EMI of new loan. Some lenders may use net monthly income while others use gross monthly income for calculating the ratio. Thus, those having existing loans with adequate repayment capacity to service a new loan should be eligible for it, provided they meet other eligibility criterion set by the lender.
Myth No. 6: All personal loans come with prepayment charges
Banks and NBFCs offering personal loans on fixed interest rates can penalise foreclosures and part-prepayments. However, there are lenders who do not penalise prepayments despite offering loans on fixed rates. Loan foreclosure or part-prepayment charges can go up to 5% of the outstanding principal or part-prepaid amount, respectively. Remember that there are some lenders who do not allow part-prepayments of personal loans whereas others allow part-prepayments only after the repayment of a predetermined number of EMIs.
Lenders offering personal loans on floating interest rates cannot levy prepayment charges as the RBI has barred lenders from charging prepayment penalties on floating rate retail loans.