There’s no denying the popularity of personal loans in India today, with people using them for a wide range of financial needs. From business costs and medical emergencies to weddings, vacations, home renovations, and more, they are playing a crucial role in the current financial landscape. Reports indicate how personal loans accounted for the biggest chunk of non-food credit in the country at 39.2% as of the end of July this year. They grew by 14.4%, touching an impressive Rs. 55.3 lakh crore in this period. Despite the massive demand for these loans, many people still avoid them due to certain misleading and wrongful myths. Here’s debunking some of them in this article.
Biggest Personal Loan Myths
Here are some of the personal loan myths that need to be debunked:
1. They are only for emergency situations-
A large number of people stay away from these loans even when they need funds to fulfill various targets/desires. This is because of the myth that they are only for emergencies in the family. Of course, they can be a great choice during emergencies, but they can also be used for many other purposes. These include renovating your home or taking care of repairs, higher education expenses, traveling in India/abroad, consolidating multiple loans with high interest rates, buying gadgets, two or even four-wheeler purchases, etc.
These are unsecured loans that do not require any security or collateral. As a result, they are flexible solutions that you can use anytime you need funds and not just during emergencies. This is one of the common myths that are still prevalent in the minds of people.
2. You will have to possess a perfect credit score-
There’s nothing that says stay away more than the misconception that you need a perfect credit score to apply for a personal loan. It is true that having a higher credit score will help you secure a loan faster at better interest rates and with more favorable terms and conditions. However, it is not a strict requirement to approve these loans across most banks. In fact, multiple aspects are factored into the equation by lenders when they examine your loan application. These include your income, employment history, debt-to-income ratio, etc.
If you do not have a perfect credit score but are still in the decent, good, or okay-ish territory, the bank will still approve your loan if you have responsible financial habits and a stable income source. You can also improve your credit score by making timely EMI and bill payments while lowering overall debt as much as you can. This will help you get better personal loan offers in the future.
3. Personal loans are not secure -
Whoever said personal loans are not safe? Many of us worry unnecessarily about these loans being unsafe and put off applying altogether. This myth comes from a lack of knowledge regarding industry and banking safeguards that are already in place. Reputable banks and NBFCs (non-banking financial companies) follow stringent regulatory guidelines and standards to ensure transparent and secure loan products to their customers. They have to disclose everything upfront, including all terms and conditions.
The loan agreements are also legally binding, offering much-needed protection/safety to borrowers as well. Reputable banking and financial institutions offer clear interest rates, repayment schedules, fees/charges, and other terms. You should, of course, choose your lender wisely to avoid any safety issues. With the right bank/financial institution, these loans are as safe as other loans or financial products.
4. Personal loan applications negatively impact your credit score-
Another outrageous personal loan myth states that applications alone will damage your credit score or impact it negatively. This is not fully true at all; while any loan application will lead to a hard inquiry on the credit report (can be for other loans as well), the effect is negligible and only for the short term.
If you responsibly manage and pay the loan (without any delays or defaults), your credit score will go up steadily in the near future. In fact, these loans can help you enhance your score by adding to the credit mix and also helping you demonstrate your history of timely payments to the lender.
5. There is a long and difficult application and processing journey-
Those subscribing to this myth have a narrow idea of personal loan applications and processing without a doubt. These loans come with a highly convenient online/offline process which involves minimal documentation compared to many other loan types. At the same time, most banks offer superfast processing with instant approvals and tech-driven underwriting. It is easier to apply for and obtain these loans than many other products.
Breaking Myths and Moving Ahead with Personal Loans
The above-mentioned myths are not the only ones that affect our personal loan decisions. Some mistakenly feel that these loans are only for salaried people (a misconception since self-employed personnel and businessmen can also apply), while some feel that they cannot be taken with existing debt (if you have a proper income and meet the eligibility criteria, then you can easily take them with existing loans).
Agreed, the interest rates are on the higher side than secured loans, although they are not always as sky-high as you may perceive (another myth). So, it’s time to break the myths that you keep hearing about personal loans and spread awareness among your near and dear ones too.