Banks and financial institutions provide financial aid in the form of personal loans to individuals who need it. A personal loan is one of the best options you can opt for when you are in urgent need of some money. Personal loans are a popular product because the proceeds of an unsecured personal loan can be used in any way deemed fit by the borrower. But there are a lot of misconceptions accompanied with a personal loan.
If you are a first-time personal loan borrower, you might have heard things like the loan application process is long or that your personal loan application will not be approved if you have a low credit score. But that is not the truth. Here are a few myths that people generally have about personal loans:
- Myth 1: You need a high credit score for personal loan approval.
This is partially true. The credit score or CIBIL score is one of the most important documents on your personal loan application and the Reserve Bank of India has made it mandatory for financial institutions to check the CIBIL score before approving a personal loan application. The banks will approve your personal loan application if you have a credit score or CIBIL score of 750.
The banks are very stringent about this and very rarely will they approve your personal loan application if you have a low credit score. However, there are other financial institutions and lenders who are flexible in terms of credit score or CIBIL score and will approve your loan application even if you have a credit score below 750, as long as all your other documents check out.
2. Myth 2: You need a collateral to apply for a personal loan.
Again, this is partially true. There are two types of personal loans: secured personal loans and unsecured personal loans. You only have to keep a collateral with the financial institutions if you have applied for a secured personal loan. However, most of the personal loans are unsecured in nature, hence, you do not need to keep a collateral with the banks or financial institutions.
3. Myth 3: You should avail an amount greater than what you actually need.
You should never avail an amount more than what you actually need. Borrowing a higher amount than what you need means you will have to pay extra interest amount on the money. One thing that you need to remember is the interest amount that you pay is dependent on the loan amount that you borrow and the tenor of the loan. So, if you have borrowed a high loan amount for a short tenor, you will have to pay a high EMI and if you opt for a long tenor, you will have to pay a lower EMI comparatively.
4. Myth 4: You can avail a personal loan only from the banks.
This is not at all true. There are a lot of lenders and financial institutions apart from the banks who will provide you with a loan. In fact, the other financial institutions and lenders will provide you with a better interest rate options and other benefits. When you are availing a personal loan, it is important that you opt for a lender who is giving you a lower rate of interest. The rate of interest provided by the Non-Banking Financial Institutions (NBFCs) is lower comparatively.
A personal loan can be a very big financial decision and it will affect your monthly financials unless you pay off all the debt. You need to make sure that you avail a loan from the right lender so that you don’t fall in a soup.