Many people seek financial assistance from personal loans when unforeseen demands develop against their best planning. Such a source of funding is fantastic for covering a variety of expenses that must be paid right immediately. Due to the fact that there are no limitations on how it may be used, many people favour this form of credit.
However, amidst several benefits, many people are still hesitant to apply for personal loans due to various misconceptions that revolve around it. Read this post to dispel common personal loan myths.
List of Common Myths About Personal Loan
- You Need A Strong Credit Score to Acquire A Personal Loan
A low credit score does not always mean rejection. However, it does have an impact on the loan amount and interest rate. Financial institutions conduct a risk assessment when you apply for a personal loan. They look into your age, income, employment stability, and employer’s status. If you are a first-time borrower with no credit history, the lender looks at other variables. - The whole idea behind the credit assessment process is to see if you are financially able to repay the loan on time. And, if your income and other criteria support this, your credit score will have a negligible effect.
- To assist you further, here are some recommendations that can help you improve your credit score.
- Avoid skipping your monthly debt obligations.
- Use windfall gains to clear your outstanding dues or any previous loan default.
- Avoid multiple loan queries and filing multiple loan applications at once to save yourself from becoming a hungry borrower.
- Limit your credit card utilisation to 30%.
Check your credit report for any errors. In the event of a discrepancy, contact your lender or the credit bureau in question.
You Cannot Acquire A Personal Loan if You Have Other Loans
Applicants who have multiple loans presume that they are ineligible for a personal loan. But, there is no logical basis for this assertion. One of the many benefits of a personal loan is that you can use it for debt consolidation. Debt consolidation refers to compiling all your debt under a single loan, so you can settle it all at once. Hence, you may be eligible to apply for a personal loan even with other debts.
However, a debt-to-income (DTI) ratio is still the factor that supports the above option. Based on the preference of your lender, if your DTI is greater than 50%, your loan application may be turned down.
You Cannot Get A Personal Loan without Collateral
The above point is another widespread rumour. However, contrary to popular belief, personal loans are an unsecured form of credit. As previously said, the lender approves the application after evaluating your income and other variables.
A personal loan requires collateral is the myth that fits in only in one circumstance- if you do not fulfil the lender’s minimum qualifying criteria. In such cases, collateral lowers the credit risk by providing a safety cushion for the lender in the event of default.
Personal Loan Increases Your Debt Burden
Many people refrain from using a personal loan because they feel it would increase their financial burden. However, this misconception can severely impact you. Contrary to this myth, you can acquire a personal loan to meet all your legitimate financial needs. A personal loan is ideal for debt consolidation, medical emergencies, higher education for children, and so on. Additionally, you have an option to choose a flexible repayment tenure that suits your budget.
You Cannot Foreclose Your Personal Loan
Since a personal loan is available for a relatively shorter tenure, many people assume that the lender will not allow foreclosure.
However, the fact is, you can easily foreclose or pre-pay your outstanding debts. The lender charges a small fee for foreclosure or partial prepayment. The fee is calculated as a percentage of the outstanding balance. With most financial institutions, foreclosure is allowed after the successful completion of the first 12 months of the repayment.
Personal Loan Disbursement Take Weeks
Contrary to this misconception, personal loans are sometimes referred to as emergency loans. You can easily and quickly access this loan during an unforeseen financial crisis.
Nowadays, financial institutions are not dependent upon the manual risk assessment model. They use artificial intelligence, machine learning, and alternative credit decision (ACD) models to assess credit risk. The implementation of these technologies allows lenders to disburse funds within 48 hours. Furthermore, the entire loan application process is also super easy with digitalisation and online procedures.
Only Banks Offer Personal Loans
The truth is far different from this legend. Alongside banks, non-banking financial companies (NBFCs) also have the license to lend money. Furthermore, the internet penetration in India has also opened up opportunities for various digital lending platforms.
NBFCs are becoming increasingly popular for personal loans because of their relatively relaxed rules and regulations.
Personal Loans Are Available Only to the Salaried Class
Since businesses and self-employed individuals can have fluctuating monthly incomes, it may seem like they are not eligible for personal loans. However, the truth is such a loan can be availed of by salaried individuals, self-employed professionals, and even Non-Resident Indians (NRIs).
Regardless of your career, having a great credit record that demonstrates your ability to repay the loan is more critical in a personal loan.
To Sum it Up
Personal loans are ideal in almost every situation. However, it is important to devote enough effort to market research. A comparative analysis of various lending institutions will not only help you debunk various myths but will also assist you in receiving a better bargain on your personal loan.
