Think you understand personal loans? These 6 myths say otherwise

Life can sometimes throw unexpected financial challenges. To deal with such challenges, individuals are forced to avail personal loans. A personal loan, therefore, can be an effective way to consolidate debt, cover hospital expenses, and facilitate a smooth home renovation. Still, it is critical to acknowledge the complications of borrowing.

Now, understanding the intricacies and complications of personal loans can not only help protect an individual's financial health but also assist in addressing common myths about personal loans and in making better, more informed borrowing decisions. Keeping the same facts in mind, here are common myths about personal loans everyone should know:

6 personal loan myths you must stop believing

I. Personal loans are only for emergencies

Yes, it is a given that personal loans should be availed to meet emergencies such as surgeries, medical tests, accidents, etc. Still, keep in mind that personal loans can also help fund planned expenses, which is why the idea that personal loans are only meant for emergencies is a myth.

Furthermore, expenses such as home renovations, education costs, or even travel can be covered with personal loans. Before availing any new loan, one should understand and acknowledge their repayment capacity, the real need for funds, and other important factors to make a prudent borrowing decision.

II. You need an excellent credit score to qualify

A high credit score helps, but lenders also consider income, employment stability, debt, repayment history, and credit inquiries. Personal loans can even be secured with collateral like gold, property, or fixed deposits, allowing approval without an excellent credit score.

III. High-income earners automatically get lower interest rates

It is a given that a high monthly income can help support your personal loan application, but lenders also consider other factors, such as your debt-to-income ratio, before deciding on applicable interest rates.

For example, if your monthly income is ₹5,00,000 and a large portion of it, say 50-70%, is already committed to credit card EMIs or other loans, it signals higher risk. That is why loan approval and interest rates are based on overall credit health, not income alone.

IV. All personal loans are expensive

Shorter repayment tenures, a clean credit history and a solid credit score, and competitive lenders can make personal loans affordable. That is why the idea that all personal loans are expensive is a myth.

The focus should only be on keeping your credit profile neat and carefully shortlisting the best possible personal loan offers from reputable lenders. This way, the myth that all personal loans are expensive can be decisively defeated.

V. Prepayment leads to heavy penalties

Prepayments are ways to pay off a personal loan before its actual term ends. Now, the terms and conditions of a prepayment are clearly explained in the loan offer document. Many lending institutions permit prepayments with minimal or no charges, while others charge fees that are clearly detailed.

That is why the belief that prepayments will result in heavy penalties is a myth that borrowers must overcome by carefully reading the loan offer document. Any personal loan you see is a product offered by a lending institution; you are just a customer looking to avail it. So you should look at these loans as professional offer documents.

VI. Applying for a loan will ruin your credit score

When you apply for a new personal loan, it will not have any negative impact on your credit score. This is a myth. The problem only arises when you submit a lot of personal loan or credit card applications to different lending institutions within a very short span of time. Such behaviour can result in ‘hard checks’, as it is a clear sign of credit hunger, and a ‘hard inquiry’ can result in bringing down your credit score considerably.

Significance of borrowing smartly

A personal loan can provide flexibility to aspiring borrowers, but it still carries risks, such as rising debt if repayment deadlines are missed, high interest rates, and the possibility of serious legal action in the event of default. To address such challenges, it is prudent to sit down with a certified financial advisor to formulate a sensible repayment plan and borrowing strategy, enabling the best possible decisions.

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