When faced with unplanned expenses, people often look to personal loans as a solution. This type of credit can be a great way to cover a wide range of immediate expenses without restrictions on how the money is used.
Despite its many benefits, some individuals remain hesitant to apply for personal loans due to misconceptions that surround it. This blog aims to clear up these common misunderstandings and give a clearer picture of personal loans.
Debunking the Myths of Getting a Personal Loan
Let’s put an end to the confusion and misinformation surrounding personal loans by examining and dispelling some of the most widely believed myths.
1. A High Credit Score is the Key to Getting a Personal Loan
Contrary to popular belief, having a low credit score does not automatically disqualify you from getting a personal loan. While it may impact the loan amount and interest rate you are offered, financial institutions take a comprehensive approach when evaluating loan applications. They consider factors such as your age, income, job stability, and employer’s standing in addition to your credit score.
If you are a first-time borrower looking to get a loan without a CIBIL score, lenders will use alternative methods to assess your ability to repay the loan. The ultimate goal of the credit assessment process is to determine your financial capability to repay the loan on time. So, if your income and other financial factors are strong, your credit score may not carry as much weight.
2. Only Banks Offer Personal Loans
The way people access personal loans has changed dramatically due to advancements in financial technology. With the rise of online banks, it’s now easier than ever to secure a personal loan without ever leaving your home.
Online banks have several advantages over traditional brick-and-mortar lenders, such as lower operating costs and more competitive interest rates. Because they don’t have the expenses of maintaining physical locations, they can pass those savings on to borrowers.
Another advantage of online lending is speed. Many online lenders can provide a loan decision in just minutes and can even offer same-day or 24-hour funding after approval. This is much faster than the traditional loan process, which can take several days or even weeks.
3. Having Other Loans Prevents you from Getting A Personal Loan
Many people assume that having multiple loans means they are not eligible for a personal loan, but this is not necessarily true. In fact, one of the main advantages of a personal loan is its potential for debt consolidation, which allows you to combine all your debts into a single loan for easier repayment.
However, a debt-to-income (DTI) ratio is still a crucial factor that lenders consider when evaluating a loan application. If your DTI exceeds 50%, there is a chance your loan application may be declined, depending on your lender’s preferences. The DTI ratio measures your ability to repay debt based on your income. A high DTI can indicates a higher level of financial stress, so lenders may be cautious when approving loans in these cases.
4. Personal Loans have a High Rate of Interest
Many people assume that personal loans come with exorbitantly high-interest rates, but this is not always accurate. Interest rates on personal loans are often determined based on an individual’s credit score and ability to repay the loan. Individuals who are considered to have a lower repayment capacity may be offered loans with higher interest rates.
On the other hand, borrowers with good credit and a solid history of repayments can receive personal loans with interest rates as low as 10.99% per annum. This highlights the importance of maintaining a strong credit score and financial history, as it can greatly affect the terms of your loan.
5. Personal Loans Always Hurt Your Credit
If you use a personal loan wisely and responsibly, it can be an effective tool for improving your credit score over time. The key to success is making all payments on time and keeping the loan in good standing.
Keep in mind, when you apply for a personal loan, the lender will run a hard credit check which may have a temporary negative impact on your score.
But if you continue to handle the loan responsibly, the positive impact of the loan should outweigh the temporary dip in your credit score. By making regular, on-time payments, you can demonstrate to lenders that you are a responsible borrower and help boost your credit score in the long run.
6. Foreclosure isn’t Possible with a Personal Loan
It’s a common misconception that personal loans, due to their relatively short repayment tenure, cannot be prepaid or foreclosed. However, the truth is, it’s possible to settle your outstanding debt ahead of schedule through pre-payment or foreclose the loan entirely. Lenders often impose a small fee, expressed as a percentage of the remaining balance, for these actions. After successfully completing the initial 12 months of repayment, most financial institutions permit the option of foreclosure.
7. You Cannot get a Personal Loan Without Collateral
Contrary to popular misconception, personal loans are not secured by any collateral. The lender decides whether to approve the loan application based on factors such as the borrower’s income and other relevant information. It’s a widely spread rumour that a personal loan requires collateral, but this is only true in rare cases where the borrower fails to meet the minimum eligibility criteria set by the lender. In such scenarios, the lender may ask for collateral to lower the credit risk and serve as a security in case the borrower defaults on the loan.
Final Thoughts
We hope that this article has been helpful in separating truth from tales when it comes to personal loans. You can now go into the loan process with confidence and peace of mind knowing that you are making the best decision for your financial future. Be sure to do your research, read the terms and conditions, and most importantly, never take out a loan you don’t need.