5 Personal Loan Myths That You Need to Stop Believing Right Now

Rohan, a 28-year-old IT professional, needed ₹10,00,000 for a medical emergency. 

He had heard that "Personal loans have very high interest rates" and "Self-employed people do not get loans." 

Does this sound familiar? Have you ever skipped taking a loan because of such myths?

But wait! Rohan decided to do some research instead of believing these rumours. He checked his credit score (780) and salary (₹75,000/month), and guess what? 

He discovered he could get a ₹10,00,000 loan at a 12% interest rate, which would bring his EMI to ₹22,244/month for five years.

What is the moral of the story? - “Suno sabki, karo apne dil ki!”

Just like this, we will bust some common myths today! Look at the 5 biggest personal loan myths you should forget right now!

Personal Loans: Don’t Let Myths Stop You When You Need Money!

Have you ever faced an emergency or had an important plan but did not have enough money? You might have considered taking a personal loan, but after hearing about others, you hesitated. Let’s clear the confusion with real facts!

An unsecured personal loan means you do not need to provide property, gold, or any collateral. You can use it for medical bills, wedding expenses, or even a dream vacation. The process is simple: apply online, submit documents, and await approval.

Read More – Personal Loan Myths Debunked: What Every Borrower Should Know

But often, friends and family say things like “Personal loans are too expensive” or “Only salaried people get approved,” which is not valid anymore!

What’s the Reality Today?

• Flexible Interest Rates: A good credit score (750+) can get you rates as low as 10.50-16%.
• Self-Employed? No Problem!: Show your Income Tax Return (ITR) or business proof, and you can get a loan.
• Fast Digital Approval: Minimal paperwork and money in your account within 2 days.

Do a little research: Check your credit score, use an EMI calculator, and compare bank offers. Ignore myths, understand the facts, and make the right decision!

Myth 1: Personal Loan Interest Rates Are Very High

Many people think personal loans are expensive, but that’s not true. Interest rates depend on your credit score, income, and loan amount.

Example:

• Credit Score 750+: Interest rate 10.50-16%

  • ₹10,00,000 loan for 5 years at 10.5% interest → EMI ₹21,493, Total Interest ₹2,89,580.

     

• Credit Score 650: Interest rate 25-40%
  • Same loan for 5 years at 25% interest → EMI ₹29,516, Total Interest ₹7,71,000.

Why Are Interest Rates Lower Now?

1. Competition: Banks and NBFCs are reducing rates to attract low-risk borrowers.
2. Digital Processing: Online applications have reduced costs, benefiting customers.
3. Credit Awareness: In 2023, 65% of Indians had a credit score above 700, making banks more willing to offer loans at lower rates.

Key Factors Affecting Rates

Pro Tips for Lower Interest Rates:

1. Loan Tenure: Choose a 3-5 year loan (longer tenure means more interest).
2. Negotiate: Ask the bank for a 0.5-1% discount if you are an existing customer.
3. Collateral: If possible, take a secured loan (against gold or securities) for lower interest (8-12%).

Example:

Myth 2: Applying to Multiple Banks Reduces Loan Approval Chances

If you apply to 6-7 banks in 6 months, your credit score may drop slightly (5-20 points). However, the real reasons for rejection are low income stability and high debt.

How Do Credit Enquiries Work?

1. Hard Inquiry: When a bank checks your credit report, your score drops by 5-10 points.
2. Soft inquiry: Checking for pre-approved offers does not affect your score.

Example:

• Sahil: Applied to 3 banks in 6 months. His score dropped from 760 to 745, but he got approval because his EMI-to-income ratio was 30% (Salary: ₹1,50,000/month, EMI: ₹45,000).

   

• Shruti: Had a 720 credit score but applied to 8 banks. “Credit score? Gaya tel lene!” Her score fell to 680, and her loan was rejected because her EMI was 55% of her salary.

   

Golden Rules for Loan Approval

1. Keep your EMI-to-income ratio below 50%.
2. If you already have 3+ active loans, getting a new one is harder.
3. A stable job history (2+ years of experience) improves approval chances.

Myth 3: Only Salaried People Get Personal Loans

Today, banks also offer personal loans to self-employed individuals, freelancers, and business owners.

Eligibility Criteria Comparison:

Example:

• Raj (Photographer): A freelancer earning ₹8,00,000 per year. Axis Bank gave him a ₹5,00,000 loan at 18% interest.
   EMI: ₹14,687.50 for 4 years.

   

• Meena (Shop Owner): She showed a ₹15,00,000 annual income (ITR) and got a ₹10,00,000 loan from Bajaj Finance at 16% interest.
   EMI: ₹28,340.08 for 4 years.

Special Loans for Non-Salaried People:

1. Professional Loans: For Doctors, CAs, Engineers (e.g., HDFC offers 12.5% interest rate)
2. Business Loans: For small businesses with GST registration
3. Pension Loans: For retired government employees

Pro Tip:

If you are self-employed, submit a CA-certified financial statement for your business. It can increase your chances of approval by 40%.

Myth 4: Personal Loans Have a High Risk of Rejection

Reality: A significant percentage of personal loan applications are successfully approved.

Approval Formula:

Credit Score (30%) + Income Stability (40%) + Low Debt (30%) = Higher Approval Chances

Top Rejection Reasons & Solutions:

1. Low Credit Score (<650): Apply with a co-applicant who has a good score.
2. No Credit History: Get a secured credit card to build credit.
3. High EMI-to-Income Ratio: Reduce the loan amount to improve your chances.

Example:

• Vikas (Delhi): He had a 670 credit score and 2 existing loans.
• He added his father (credit score 810) as a co-applicant.
• SBI approved ₹7,00,000! - “Dad ka credit score, Vikas ke life ka booster!”

Digital Advantage

Fintech apps like PaySense and MoneyTap offer pre-approved loans through soft enquiries (which don’t affect your credit score). This doubles approval chances!

Myth 5: Credit Cards Are Cheaper Than Personal Loans

Reality: Credit card debt can be 3 times more expensive than a personal loan!

Let’s Do the Math:

• Personal Loan: ₹5,00,000 at 15% interest for 3 years → Total Interest: ₹1,22,000.
• Credit Card Debt: If you roll over ₹5,00,000 at 42% interest in 3 years → Total Interest: ₹3,15,000.

Personal loans are much cheaper than carrying credit card debt long-term!

Example:

• Rohit bought an iPhone for ₹1,50,000 using a credit card.
• He only made minimum payments for 6 months, and the total cost became ₹2,10,000!
• If he had taken a personal loan at 14% interest, the total cost would have been just ₹1,68,000.

Pro Tip:

If you need emergency funds, use your credit card’s 50-day interest-free period. But after that, take a personal loan to pay off the credit card debt and save on high interest!

Why Are These Myths So Common?

The biggest reason for personal loan myths is a lack of financial knowledge and an old mindset. Many people don’t know the latest bank/NBFC rules and rely on friends, family, or viral social media posts.

For example:

• 10-15 years ago, personal loan interest rates were 18-25%, but today, digital competition and RBI regulations have reduced them to 10-12%. Yet, people still believe in old numbers.
  
  Also Read - These 5 Common Lies Loan Agents Tell—Don’t Fall for Them

   

• Many think only salaried people can get loans, but today, freelancers, gig workers, and small business owners can qualify by showing ITR/GST proofs.

   

Why Is It Important to Bust These Myths?

1. Fear Leads to Bad Decisions

• People avoid personal loans and take credit card cash advances (40%+ interest) or borrow from moneylenders instead of getting a loan at 15-20%.

   

2. Confusion About Collateral

• Many believe a personal loan needs property or gold as security, but 90% of personal loans are unsecured (no collateral required).

   

3. Missed Opportunities

• Due to myths, people avoid loans for emergencies or business growth and end up in financial trouble.

   

What’s the Reality?

Interest Rates Are Flexible:

• Your credit score, job stability, and income decide your rate.
• High interest rates only apply to low-credit borrowers.

Loan Approval Is Easy & Digital:

• Today, you can apply online in 2 minutes and get instant pre-approval.
• The idea that "loans are hard to get" is from the early 2000s.

Loans Are More Transparent:

• RBI rules require banks to clearly show processing fees, prepayment charges, and EMI breakdowns.

Key Factors Influencing Personal Loan Interest Rates and Approval

Conclusion

A personal loan can be a smart and affordable financial option if you understand it well. The key is to ignore myths and focus on facts:

• A good credit score (750+), stable income, and low debt can help you get low interest rates (10-12%).
• Self-employed individuals, freelancers, and retirees can also qualify with proper documents.
• Digital lenders and competition have made loans faster and cheaper than credit card debt.

Before applying: Check your credit score, compare lenders, and calculate EMIs to ensure they fit your budget. Whether it’s for an emergency, a big purchase, or debt consolidation, a well-planned personal loan can save money and reduce stress.

"Toh doston, agle baar loan lene se pehle, myths pe mat jao… EMI calculator pe jao!"

FAQs

1. Are personal loan interest rates always high?

 No! Interest rates depend on your credit score, income, and loan tenure. 

2. Can self-employed individuals get personal loans?

  Yes! Banks offer loans to self-employed people with proof of income (ITR for 2-3 years). Example: A freelancer earning ₹8,00,000/year can get a ₹5,00,000 loan at 18% interest. Tip: Submit CA-certified financial statements to increase your chances.

3. Will applying to multiple banks hurt my credit score?

  Only if you apply too many times. Each "hard inquiry" (formal application) drops your score by 5-10 points. Apply to only 3-4 banks in 6 months. Tip: Use fintech apps for pre-approved offers (these do not affect your score).

4. Is a personal loan cheaper than credit card debt?

    Yes! ₹5,00,000 personal loan at 15% (3 years): Total interest = ₹1,22,000. Same amount on credit card at 42%: Total interest = ₹3,15,000. Tip: Use credit cards for short-term needs but take a personal loan for big expenses.

5. How can I improve my chances of getting a loan approval?

    Keep EMI-to-income ratio below 50%. Add a co-applicant with a high credit score. Show stable income (2+ years in a job or business). Avoid multiple active loans (ideally, have 2 or fewer). 

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About the Author

LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?