You may have a cash crunch now and then. From meeting wedding expenses, having a medical emergency or planning a home renovation, the cash shortage could be due to a wide variety of reasons. At such times, your first impulse might be to seek a loan from friends or family. That might seem like an easy option, but it is not advisable due to the uneasiness money can bring into relationships.
Instead, you could consider taking a personal loan. But have you ever considered a personal loan and were deterred by the misconceptions about it? Here’s an attempt to dispel five misconceptions about personal loans.
Myth: Personal Loans Come With High Interest Rates
A personal loan is often considered an expensive loan option as its interest rates range between 8.9%-24% p.a. But the fact is that personal loans are the cheapest unsecured loan. In comparison, other unsecured debt such as credit card dues could be much more expensive – in some cases, the interest could be upwards of 40% per annum. If you had a collateral, you could simply take a collateralised or secured loan and enjoy much lower rates. However, in the absence of a collateral, you’ll have to take a personal loan. The interest rate for a personal loan is set by the lending institution after factoring in the borrower’s repayment capacity and credit score. While individuals with lower credit score and repayment capacity are offered the loan at a higher interest rate, the ones with a healthy credit score can enjoy lower interest rates. Before applying for a personal loan, it would be wise to compare interest rates offered by different lenders in order to get the best deal.
Myth: You Won’t Get A Personal Loan With A Low Credit Score
Lenders consider your credit score before sanctioning a loan. But besides the credit score, they also consider your income, repayment capacity and debt-to-income ratio. Many borrowers have this misconception that lower credit score results in rejection of the loan. This doesn’t hold as there are many that lenders offer personal loans to people with a low credit score as well. Lenders reserve the best interest rate offers for people with credit scores above 750 while those below may have to pay higher rates. It is a good habit to keep checking your credit report and take steps to improve your credit score to get the best deal. However, it is equally important to compare and understand personal loan offerings by various lenders to find the most suitable option for yourself.
Myth: You Can Avail Personal Loans Only From Banks
Another common myth about a personal loan is that it can only be availed from a bank. Many Non-Banking Financial Companies (NBFCs) also offer personal loans at competitive interest rates. When a bank rejects your loan application for any reason, you can always reach out to NBFCs who may be able to provide you a deal based on your eligibility. However, banks generally charge the lowest rates on personal loans while loans from NBFCs may be costlier in terms of interest.
Myth: You Can’t Make A Pre-payment On A Personal Loan
If you want to take a personal loan because of current financial challenges, you may want to make prepayments to save on the interest amount as and when your financial situation improves (or even completely close the loan before the repayment tenure is over). However, many people mistakenly think that prepayments are not allowed on personal loans. The fact is that you can make prepayments on personal loans after either 6 to 12 months of regular EMI payments. However, this varies for a bank to bank. Before you take a loan, it would be good to understand all the terms and conditions of the lender about your loan. Do keep in mind that there might be a nominal prepayment fee. The pre-closure or prepayment norms vary from bank to bank. While some banks do not levy any charges for foreclosures and part-prepayments, other lenders might.
Myth: You Won’t Get A Personal Loan If You Are Self Employed
It is a common misconception that only people with a regular flow of income can apply for personal loans. While the lending norms are often more relaxed for salaried borrowers, the self-employed who meet the lending criteria can easily avail a personal loan. Do keep in mind that the loan and interest rate charged is set based on your credit history, income, employment stability and debt-to-income ratio.
Personal loans are popular because they can be availed easily and quickly. In the case of pre-approved loans, the amount of paperwork required is negligible. The process of availing a personal loan has evolved and one can now be easily availed at the click of your mouse from the comfort of your home, in a paperless, contactless fashion as demanded by the ongoing social restrictions due to Covid-19.
The author is CEO, BankBazaar.com, India’s leading online marketplace for loans and credit cards.
Need help in calculating your EMI? Use BankBazaar’s easy Personal Loan EMI calculator.