With No collateral, quicker disbursal and no restriction on the end usage of funds, personal loans can come handy for meeting unexpected and sudden financial shortfalls. However, numerous false notations associated with personal loans because of which many individuals refrain from applying for them.
Let’s look at some of these widespread misconceptions regarding personal loans:
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 dispersed 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.
Low credit score means loan rejection
While credit score is one of the most important factors considered by the lenders to evaluate your loan application, having a 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 the interest rate charged in case of those with low credit scores is likely to be higher than those with higher credit scores.
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 rates, they have relaxed loan eligibility and approval process as that compared to banks.
Personal loans offer a higher interest rate
Personal loans are often considered as a costly credit option. However, this holds true mostly in case of those with poor credit profiles. 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 loans against credit cards and credit card EMIs come with higher interest rates than personal loans for similar credit profiles.
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 a 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 criteria set by the lender.
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. 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.
