Personal Loan Myths That Could Cost You Thousands

Sheetal is a freelance designer. She required ₹2.5 lakhs for upgrading her work setup. Her friend advised her to not use a personal loan and use her credit card. She followed her friend’s advice. In six months, she paid around ₹18,000 as interest.

If she had opted for a personal loan at 11.5% per annum, she would have paid just ₹7,125 in interest. Sheetal ended up spending ₹10,875 more due to wrong advice. 

Personal loans are helpful financial tools. But most of you still avoid them or make costly mistakes because of myths. In this blog, we will look at some common myths that could cost you money too.

1. Only Salaried Employees Are Eligible For Personal Loans

This is not true. You can apply if you are self-employed such as:

• Business owners
• Consultants
• Freelancers

Your lender will check your:

• Income consistency
• Financial documents
• Credit score

2. Collateral Is Necessary For Personal Loans

Most of us get confused about whether we need to provide any collateral for such loans or not. So, you should always remember that personal loans are unsecured loans. You don’t have to provide gold, property, or any asset as security.

Note:

You need to provide collateral only for secured loans like a loan against property or gold loan, not for personal loans.

3. Submitting Applications To Multiple Banks Improves Chances

If you apply to too many banks at once, it can harm your credit score. Your every enquiry is recorded. The following is the impact of multiple applications on credit score:

4. Always Choose The Longest Repayment Tenure

It is true that a longer tenure will reduce your monthly EMI. But it will also increase the total interest you will pay. You should choose a tenure that you can manage comfortably.

The following is the loan cost based on tenure for Nidhi’s loan of ₹3 lakhs at 12% p.a.:

If Nidhi opts for 5 years tenure then she will have to pay ₹61,080 more in interest compared to a 2 years tenure.

5. Loans Cannot Be Prepaid Or Closed Early

Most of your banks allow you to prepay your loan after 6 to 12 months. Some charge 2% to 5% of the outstanding amount, while others don’t charge at all.

Prepayment Savings Example: 

Even if you prepay part of your loan it will help you save a large amount.

6. A Pre-Approved Offer Means Guaranteed Loan Disbursal

Most of us assume that a pre-approved personal loan offer means money will be transferred instantly to our account without any further checks. But it is not true.

Pre-approved simply shows that your bank has screened your basic financial history and found you eligible in principle. The final approval still depends on a fresh review of your:

• Current income
• Outstanding debts
• Supporting documents

Key stages after a pre-approved offer:

7. Personal Loans Work The Same Way For Everyone

Loan features are not the same for everyone, it varies from person to person. Your interest rate, processing charges, and approval amount depend on several factors:

• Your income level
• Your credit score
• Your employment type
• Your relationship with the bank

Example:

8. Personal Loans Always Come With High Interest Rates

It is not true. Interest rates are based on your:

• Credit history
• Income
• Employer type

If your credit score is high, you may get a much lower rate.

9. Personal Loans Are Only For Urgent Needs

It is not only for your urgent needs. You can use it for planned expenses for too like:

• Weddings
• Education
• Home repairs
• Small business expansion

10. Personal Loans Harm Credit Score

It does not affect your credit score unless you miss repayments. In fact, timely EMIs can improve your score over time.

Final Thoughts

If you are planning to get a personal loan then it is necessary for you to get all details about it. This will help you avoid half-truths and you will be able to make a sound financial decision. 

Believing myths like "you must be salaried" or "loans are always expensive" can cost you dearly. As in Sheetal’s case, the wrong choice led to over ₹10,000 in unnecessary interest.

You must not make any rushed decision and take time to:

• Compare offers
• Calculate the total cost
• Read the terms carefully.

FAQs

1. Can I get a second personal loan before repaying the first?

Yes, if your repayment capacity allows.

2. Will a personal loan lower my credit score?

Not if you repay on time.

3. Are interest rates always high?

No, rates depend on your credit score and income.

4. Is collateral needed for a personal loan?

No, these are unsecured loans.

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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?