6 common myths about personal loans that could cost you money

For any financial emergency or any other purpose, you can rely on personal loans. They are quick and easy to get, provided you meet the eligibility criteria. They are collateral-free. You don’t need to tell the bank or NBFC the purpose for which you will be using the personal loan money. The demand for personal loans has increased in the last few years due to the ease of getting them and the flexibility to use the money.

However, there are some myths around personal loans, and busting them is important. So, let us debunk some of the personal loan myths.

Personal loan myths

Personal loans can be used only for emergencies: Some people tend to correlate personal loans with emergencies like hospitalisation, house repairs/renovation, debt consolidation, etc. While personal loans can be used for these emergencies, these are not the only purposes they are meant for.

These days, many people take personal loans to celebrate happy occasions like marriage, family vacations, etc. People also take personal loans for education, skill development, etc., for themselves or a family member, if they are unable to get an education loan.

Getting a personal loan takes a lot of time: There was a time when people had to visit the bank or NBFC branch for a personal loan. They had to fill out an application form and submit the KYC and income documents for the personal loan. The financial institution would send the form and documents to the credit department. The credit department would review the application, check the credit score and financial documents, analyse all the information, and give the decision. The entire process would take a few days.

However, with digital banking today, personal loan applications are at your fingertips and the entire process can be completed in a single day or within a few hours. Your KYC details, like PAN and Aadhaar, can be verified online. Your credit score can be accessed online from the Credit Information Companies (CICs). You can submit soft copies of your salary slips and bank account statements. The bank’s credit assessment systems can analyse all the above data online in a few minutes to a few hours.

Thus, getting the personal loan application approved on the same day is possible, provided you submit all the required information and meet the eligibility criteria.

Personal loans are expensive: The interest rate charged on your personal loan depends on several factors. On a broader level, the overall interest rate regime in the economy influences the interest rates on all types of loans, including personal loans. For example, as of September 2024, the current interest rates in the economy are high. Hence, the interest rates on all types of loans, including personal loans, are higher than they were on similar loans in 2021-22.

Repo rate movement in the last ten years

(Source:https://tradingeconomics.com/india/interest-rate)

The above chart shows the Repo Rate movement in the last ten years. Financial institutions link their loan interest rates to a benchmark rate like the Repo Rate. So, when the benchmark interest rate goes up, the interest rate on all linked loans will go up. As the current market interest rates are high, the personal loan interest rates are higher.

The interest rate on personal loans is usually higher than secured loans. However, the interest rate charged on personal loans depends on overall interest rates in the economy, the individual’s profession, credit score, relationship with the bank and other factors. If you are a privileged customer of the bank, you may get a personal loan or other loans at concessional rates than others.

Some loans, like credit card loans, have a much higher interest rate than personal loans. The interest rate on credit card outstanding carried forward is usually in the 36-45% p.a. range.

Before applying for a personal loan, compare the interest rates of various banks and NBFCs. Shortlist 3-4 financial institutions offering the lowest interest rates and other favourable terms. Get in touch with them and choose the one that suits your needs.

You need a high credit score to get a personal loan: Your credit score plays an important role in deciding whether you can get a personal loan. Banks usually consider a credit score of 750 or above as a good credit score. If your credit score is 750 or higher, and you fulfil the other eligibility criteria, you should be able to get a personal loan.

You don’t need an exceptionally high credit score to get a personal loan. However, if you have a good credit score of 800+, the bank may offer you a personal loan at an interest rate lower than others with a lower credit score. On the other hand, if your credit score is lower than 700, the bank may either reject your application or offer you a personal loan at an interest rate higher than others with a better credit score.

So, a credit score of 750 or above is good enough to get a personal loan, provided the other eligibility criteria are fulfilled.

Personal loan cannot be availed if you have an existing loan running: It is an absolute myth that you cannot avail a personal loan if you have an existing loan running. You can have more than one loan at the same time. When you have an existing loan and apply for another loan, banks look at your repayment capacity.

An important parameter that they look at is the debt to income (DTI) ratio. The DTI ratio measures the percentage of monthly income going towards debt repayment. After considering the EMI of the personal loan you have applied for, if your DTI is less than 40%, the bank can give you the personal loan, provided you meet the existing criteria.

So, you can apply for a personal loan even if you have an existing loan running.

Only salaried people get personal loans: People in Central and State Government jobs, big reputed companies, and many other companies tend to have stable jobs. Banks do prefer personal loan customers to be salaried as they have a fixed income coming in monthly. However, that doesn’t mean they give personal loans to only salaried people.

Apart from salaried people, banks and NBFCs give loans to self-employed people and business owners. As long as any individual has an income source, repayment capacity and fulfils other eligibility criteria, they can get a personal loan.

Whether emergency or any other occasion: You can rely on personal loans

We have busted the common myths about personal loans. Now that you are aware, the next time you need to borrow money from a financial institution, don’t hesitate to apply for a personal loan. Whenever you have any doubt, it is better to clarify it with the bank representative. Personal loans are quick and easy to get without any collateral. You can rely on them during emergencies as well as other situations.