Personal Loan Myths Debunked: What Every Borrower Should Know

Are personal loans as bad as people say? If you've ever hesitated to apply for one, you've heard some scary stories. Let’s talk about Rahul, a 32-year-old IT professional in Mumbai. 

He needed ₹5 lakh for his sister’s wedding but avoided taking a personal loan because he believed it would trap him in debt forever. Instead, he used multiple credit cards and was drowning in interest payments within six months. 

Had Rahul taken a personal loan with a 12% interest rate for three years, he would have paid only ₹16,607 monthly. Instead, his credit card dues increased to ₹25,000 a month due to a high 36% annual interest. The proper financial knowledge could have saved him thousands!

Many Indians avoid personal loans because of myths that have existed for years. However, the personal loan market in India has been expanding, with banks' credit increasing by 12.4% year-on-year as of December 2024. This growth indicates that more individuals are recognising the benefits of personal loans. 

The solution is understanding the facts. So, let’s find out these common myths!

Myth 1: Personal Loans Are Only for Emergencies

Read More - 5 Personal Loan Myths

Neha, a 28-year-old marketing executive, dreams of taking a digital marketing course that costs ₹1.2 lakh. She believes personal loans should only be used for medical emergencies or financial crises, so she puts her dream on hold. 

But here’s the truth: personal loans can be used for anything that improves your financial health, including education, home renovations, weddings, or even travel.

Let’s assume Neha takes a personal loan of ₹1.2 lakh at 11% annual interest for two years. Her EMI would be:

Where:
 

• P = ₹1,20,000
• r = 11% per annum = 0.11/12 per month
• n = 24 months

Using this formula, her EMI comes to around ₹5,644. 

Compare this to using a credit card with a 36% interest rate. Her monthly payment would be at least ₹7,000, and she would end up paying an additional ₹45,000 in interest alone!

A personal loan isn’t just for emergencies; it’s an innovative financial tool that can be used correctly. Many borrowers use them for planned expenses like weddings (₹2-5 lakh), home renovations (₹3-10 lakh), and even starting small businesses.

Myth 2: Personal Loans Have Extremely High Interest Rates

One of the biggest misconceptions is that personal loans always come with sky-high interest rates. Interest rates depend on factors like your credit score, loan tenure, and lender.

How Interest Rates Work

Let’s break it down with three different credit scores:

With a good credit score (750+), you can secure a personal loan at just 10.5% per annum. But even if your score is lower, lenders still offer reasonable rates compared to credit card interest, which can be as high as 36-42% annually.

How to Get a Lower Interest Rate

1. Improve Your Credit Score: If your score is below 700, pay off existing debts before applying. Even a 20-point increase can get you a lower rate.
   
   
2. Choose a Shorter Tenure: While longer tenures reduce monthly EMIs, they also mean paying more interest over time. Opting for a 3-year tenure instead of 5 years can reduce the total interest paid.
   
   
3. Compare Lenders: NBFCs and digital lenders often offer lower rates than traditional banks. Always compare before applying.

So, are personal loan interest rates sky-high? No! They are flexible and can be as low as 10% for eligible borrowers. You need to understand your options and make an informed choice.

Myth 3: A Perfect Credit Score Is Required to Get a Personal Loan

Many people believe that without a 750+ credit score, getting a personal loan is impossible. That’s simply not true.

Rohan, a salaried employee with a credit score of 670, applies for a personal loan of ₹3 lakh. A traditional bank might reject his application, but an NBFC or digital lender could offer him a slightly higher interest rate loan.

The trick is knowing where to apply. Even if your credit score isn’t perfect, you can still qualify with alternative lenders, collateral-backed loans, or by having a co-applicant.

Myth 4: Applying for a Personal Loan Will Harm Your Credit Score

Many borrowers fear that applying for a personal loan will cause a massive drop in their credit score. But the reality is different.

A hard inquiry may reduce your score by a few points, but responsible repayment can boost it significantly over time. Here’s how:

Loan Repayment Impact on Credit Score

Riya takes a ₹2 lakh personal loan for 2 years. Initially, her credit score is 720. If she pays EMIs on time, her score can increase to 760 within a year. But if she misses payments, it could drop to 650 or lower.

Tips to Maintain a Good Credit Score:

• Make EMI payments on time every month.
• Keep your credit utilisation below 30%.
• Avoid multiple loan applications in a short period.

Instead of harming your credit, a personal loan, if managed well, can improve your financial health!

Myth 5: Personal Loans Are Only Available from Banks

This is one of the biggest myths in India. While banks are a common choice, they are not the only option.

NBFCs, fintech lenders, and peer-to-peer lending platforms provide competitive personal loans with faster approval times and fewer formalities.

Comparison: Bank vs NBFC Loan Approval

So, if your bank rejects your application, don’t panic. Other options exist with competitive rates and fast approvals!

Myth 6: If You Have Existing Debt, You Won’t Qualify for a Personal Loan

Many borrowers assume that they will be instantly rejected for a personal loan if they already have a home loan, car loan, or credit card debt. That’s far from the truth.

Lenders primarily look at the debt-to-income (DTI) ratio, which measures how much of your income goes toward paying off debt. A lower DTI increases approval chances. 

For instance, if you earn ₹80,000 per month and already pay ₹25,000 in EMIs, your DTI is (25,000 / 80,000) × 100 = 31.25%. Most lenders approve loans if the DTI is below 40-50%.

So, if you have existing debt but your income supports another loan, lenders will still approve it. You can also improve approval chances by choosing a longer tenure or a lower loan amount.

Myth 7: The Loan Approval Process Is Complicated and Time-Consuming

Borrowers still believe personal loans take weeks to get approved, requiring endless paperwork. That might have been true a decade ago, but today, loans are approved in minutes.

With digital lending, most banks and NBFCs provide instant personal loans. If you meet the eligibility criteria, you can get the amount in your account within 24 hours. For example, leading fintech lenders like Loansjagat and HDFC provide quick personal loans where you only need basic KYC documents. No physical branch visits, no long queues—just a few clicks!

Even if you apply at a traditional bank, online application portals and pre-approved offers have simplified the process.

Also Read - Loan Rejection Causes

Myth 8: Personal Loans Have Hidden Fees That Make Them Unaffordable

Many borrowers hesitate, fearing lenders will charge excessive hidden fees. But legally, lenders must disclose all charges upfront.

Standard fees include processing fees (1-2%), late payment charges, and prepayment penalties. Let’s compare two different loan scenarios:

There won't be surprises if you carefully check loan agreements before signing. Avoid lenders who hide charges or don’t provide clear documentation.

Myth 9: Prepayment Penalties Make Early Loan Repayment Impossible

Borrowers fear they will be penalised for prepaying their loans. However, many lenders now allow early repayment without penalties.

Suppose you take a ₹2,00,000 loan for 4 years at 12% interest. If you prepay after 2 years, your interest saved is significant:

• Regular EMI for 4 years: ₹5,267
• Total paid in 4 years: ₹2,52,816
• Prepay after 2 years: ₹1,26,000 remaining (instead of ₹1,52,000 in interest and principal)

Some lenders charge a 2-3% prepayment fee, but the savings on interest are far more significant. Check the prepayment terms before signing.

Myth 10: Personal Loans Are a Sign of Financial Trouble

Many think taking a personal loan means financial struggle. But in reality, strategic borrowing can boost economic growth.

For example, using a personal loan to consolidate credit card debt at 12% interest instead of paying 36% on multiple cards is smart. Similarly, using a loan to upgrade skills or invest in home improvements can increase future income and property value.

A personal loan is a financial tool. Whether it’s good or bad depends on how wisely you use it.

Many financially stable individuals take personal loans for convenience, flexibility, and better interest rates. Instead of breaking long-term savings or investments, a personal loan can provide quick funds without disturbing your financial plans. 

For instance, if you need urgent funds for a wedding, travel, or a medical emergency, a personal loan offers a structured repayment plan. Rather than being a sign of trouble, it can be a responsible way to manage finances and maintain cash flow.

Conclusion 

Many myths about personal loans stop people from making smart financial decisions. Loans are not just for emergencies. Interest rates are flexible. Approval is quick. 

Always compare lenders, check for hidden charges, and understand your repayment plan. A personal loan can reduce financial stress rather than add to it if used wisely.

So, don’t let myths stop you. Research well and make a good decision!

FAQs

1. What minimum salary is required for a personal loan in India?
Most lenders require a monthly income of ₹15,000 to ₹25,000, depending on the city.

2. Can I get a personal loan without a credit score?
Some lenders offer loans to individuals with no credit history, but the interest rate might be higher.

3. What is the maximum tenure for a personal loan?
Most personal loans have a tenure between 12 months to 60 months.

4. How can I reduce my personal loan EMI?
Opt for a longer tenure, a higher credit score, or prepay a portion of the loan.

5. Can I use a personal loan for home renovation?
Yes, many borrowers use personal loans to upgrade or renovate their homes.

6. Does applying for multiple loans reduce my credit score?
Yes, multiple loan applications in a short period can lower your credit score.