7 Popular Personal Loan Myths Busted!

Feb 28, 2017

People sometimes find themselves in unenviable financial positions and Raunaq Singh was in the middle of precisely one such situation. Having taken on the onus of part funding his older sister's wedding to help out his father, a retired schoolteacher, he had seriously miscalculated.

As a young professional, Raunaq could not back down from his commitment and was in the throes of indecision when his best buddy Vishal advised him to consider taking a personal loan to tide over the crisis.

Are you too one of those who considered applying for a personal loan but were reluctant to take the next step? Could it be because of the stories you have heard about the perils of taking a personal loan?

The fact is, many people hesitate despite the fact that personal loans have helped millions to better their lives.

Outdated facts and stories have created myths over the years. Let's explore the facts and separate them from the fiction.

Myth #1: Personal loans charge unfair rates of interest

The average rate of interest for a personal loan is around 12%-14%. This may seem high but compare that with credit cards. Interest rates can hover anywhere between 36%-48%. Yet in times of emergencies, most people draw out their credit cards. These days, it is pretty easy to get a personal loan. You don't even need to pledge any collateral to obtain a loan. So if you need cash at a short notice, it is always better to opt for a personal loan.

Myth #2: All lenders charge the same

Most people compare different personal loan schemes only by the rate of interest charged. But to get a true cost of the loan, you need to look out for the additional fees incorporated into the loan structure. Some lenders include origination fees which can range from 1% to 5% of the total loan. In addition, a prepayment penalty too could be added to the loan. This is a fee you will be charged if you pay off the loan ahead of time. You need to read the fine print to find out the how much your loan actually costs.

Myth #3: You can avail a personal loan only if you have a salaried job

People believe that you need a salary slip and company ID to obtain a personal loan. This is a widespread myth. Private businessmen and self-employed people are eligible to avail loans too. Today, some lending houses even give personal loans against house rent income. You may need to pay a higher rate of interest, but rejection is rare.

Myth #4: Forget about a loan if your credit rating is poor

A bad credit score does not eliminate your chances of obtaining a personal loan. However, it can impact the interest rate at which your loan is processed or the amount your lender is willing to give you. This is because you could be a potential default risk for the lender. The loan may also come with certain limitations attached. However, lenders have identified new loan schemes to cater specifically to customers with bad credit ratings. These programs do not consider your credit score before giving you a loan.

Myth #5: You can use a personal loan for personal reasons only

Despite being termed a personal loan you can pretty much use it for any purpose. Your lender is not interested in how you use the loan amount as long as you make your payments regularly and disclose your intentions. In fact, you can put the money from a personal loan into a business venture too. If you have started a new business, your company may be ineligible to procure a loan due of its lack of credit history. A personal loan can come in handy at this point. You can also clear off multiple debts by taking out a personal loan. This will not make the debt vanish but instead of having multiple loans with varying interest rates, you will have a single loan with an affordable interest rate.

Myth #6: No tax benefits

Regardless of what you may have heard, you can indeed claim tax benefits for a personal loan. Firstly, a personal loan is not considered as income. So when you file your IT returns, this amount will not be included as part of your taxable fund. But this is only applicable if the loan was sourced by a bank or a financial institution. Secondly, you can claim tax benefit on your personal loan if the loan amount has been used for a valid expense.

Myth #7: Tedious approval process

Many customers believe that it takes a great amount of time for a personal loan to get approved. This is far from the truth. Compared to other loans schemes, a personal loan requires minimum documentation. Nowadays, you can apply for a personal loan online and go about your work. The lender sends a representative to complete the documentation process. The approval takes only a few minutes after which you can receive the loan in less than 72 hours. You can complete the entire process without stepping out of your house.

So the next time you need immediate finance to tide over a short-term liquidity crisis forget these myths and consider availing a personal loan!