Common Misconceptions About Personal Loans
Low credit score leads to loan rejection
Many borrowers assume that a low credit score would result in the loan application being rejected. While your credit score is considered when evaluating loan eligibility, there are factors taking precedence over a low credit score. Financial institutions factor in aspects such as the borrower’s income and their repayment capacity in combination. However, note that the interest rate for individuals with a low credit score is higher than those with higher ones.
Personal loans have a high rate of interest
A number of individuals believe that the rate of interest on these loans is generally very high. However, this is not always the case. In many instances, financial institutions and other lenders set interest rates based on the individual’s repayment capacity and credit score. Individuals who have a low repayment capacity are generally provided loans at higher interest rates. Borrowers with a good credit score and track record can get a personal loan with an interest rate as low as 10.99% p.a.
Personal loans can only be availed from banks
Another common misconception about loans is that a lot of individuals assume that banks are the only financial institutions that offer personal loans. While banks do comprise a majority of the financial institutions that offer loans, there are a number of Non-Banking Financial Companies (NBFCs) that offer personal loans. In a number of instances where banks reject an applicant’s personal loan application, NBFCs and other digital lenders are willing to accept loan applications from these borrowers since their loan eligibility criteria is more flexible than those set by banks.
Personal loans cannot be availed if you already have an existing loan
A number of loan applicants believe that they cannot avail a personal loan if they are already repaying an existing loan. This is not true and the same criteria is applied to sanctioning a second personal loan as is for the first one. Financial institutions accept loan applications based on the borrower’s repayment capacity and their current income. The loan application is either accepted or rejected based on the applicant’s capacity to repay the loan after taking into consideration existing EMI payments.
Only salaried individuals can apply for personal loans
It is a common belief that only those individuals who have a steady flow of income are eligible to apply for personal loans. This is another myth about how loan applications are evaluated. For salaried individuals, having their loan application accepted is easier since there is a regular inflow of funds. However, individuals who are self-employed can also avail personal loans and the approval of the loan amount is based on the individual’s credit history. However, the amount that is sanctioned might vary.
Personal loans do not have a prepayment option
Another myth about personal loans is that the borrower cannot repay the loan amount before the tenure ends. Most individuals believe this because personal loans tend to have a much shorter tenure than other types of loans. However, borrowers can repay the loan amount before the end of the loan tenure. Most financial institutions tend to have a minimum tenure for which individuals have to make the monthly EMI payments. Following the completion of the minimum tenure, borrowers can foreclose their loan. They will need to pay a certain amount as the foreclosure fee.
Some borrowers believe that the processing time for most loan applications is very long and requires a lot of documentation. This may have been true several years ago. Right now, applying for a loan and having the amount disbursed to your account can be done within 48 hours. Additionally, some banks have instant loan option. This disburses the loan amount to the borrowers account within minutes of submitting the application.