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Tata Capital > Blog > Personal Use Loan > Personal loan myths busted: Common misconceptions you shouldn’t believe

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Personal loan myths busted: Common misconceptions you shouldn’t believe

Personal loan myths busted: Common misconceptions you shouldn’t believe

Personal loans are often seen as a quick and easy way to handle urgent financial needs. No collateral requirement, fast approval, and flexible usage make them an easy choice for many borrowers. But despite these benefits, many people hesitate because of personal loan myths they have heard over time.

From questions like “Does a personal loan affect credit score” to doubts like “Is a personal loan bad for CIBIL”, confusion is quite common. These myths about personal loans can lead to poor decisions or unnecessary fear.

In this blog, we will try to debunk common personal loan misconceptions to help you make smart borrowing decisions and avoid costly mistakes. Keep reading.

Why do personal loan myths exist?

Many personal loan myths start from simple misunderstandings and outdated information. People often hear something from a friend or relative and accept it as true without checking the details. Over time, these ideas keep getting repeated and start to feel like facts.

Another reason is that not everyone is familiar with how loans and credit systems work. This lack of clarity can lead to confusion and misconceptions about personal loans.

Sometimes, old rules or past experiences are treated as current facts, even when things have changed. This is why it is always better to check updated and reliable information before making any decision.

Top personal loan myths vs reality

It is time to separate assumptions from reality. Many myths about personal loans may sound convincing at first, but they do not always reflect how things actually work.

In the next sections, we will debunk some of the most common personal loan myths one by one. This thorough comparison of personal loan facts vs myths will help you visualize what is true and what is not.

By the end, you will be better prepared to avoid confusion and make more informed borrowing decisions.

Myth 1 – Personal loans take too long to get approved

Earlier, personal loan approvals were time-consuming, involving lengthy paperwork and multiple bank visits. Many people still believe the process is slow. But things work differently now. With digital lending apps, you can enjoy personal loan approval within a few minutes. The money is transferred to your bank account the same day. You are no longer required to visit the lender in person with your documents.

Myth 2 – Personal loans always come with very high interest rates

It is easy to think that personal loans are always costly, but that’s not the case in reality. The rate is not fixed for everyone. It changes based on your credit score, income, and how lenders assess your profile. Even the same borrower can get different rates from different lenders. That is why it is worth checking a few lenders and reading the terms carefully before making a choice.

Myth 3 – A low credit score means automatic rejection

Borrowers often believe that their personal loan applications would be rejected if their credit scores are not good enough. However, this is not entirely true. Although the credit score is an important factor, it’s not the only one lenders consider when evaluating loan applications. They also look at your income stability, employment status, and current debt obligations. You can still qualify for a personal loan with a moderate credit score, but the interest rate may be slightly higher.

Myth 4 – Only salaried individuals can apply for a personal loan

This is another common misconception. Personal loans are not limited to salaried applicants. Self-employed individuals and business owners can also apply for the same. The main difference lies in the required documents. Instead of salary slips, self-employed applicants may need to submit bank statements, Income Tax Returns (ITRs), and business registration papers. As long as your business is steady and has a good annual turnover, you can get approval.

Myth 5 – You cannot take a personal loan if you already have one

If you are already using a personal loan, it does not automatically stop you from applying for a new one. Lenders check how much your monthly income is going towards the repayment of your debts. If you have enough income to pay EMIs for a fresh loan, you can easily get approval for another personal loan. However, taking multiple loans without proper planning can increase financial pressure.

Also,read – Experian Credit Score: How to Check, Benefits and Importance

Myth 6 – Prepayment or foreclosure is not allowed

Like any other loan, personal loans allow prepayments and/or foreclosures. Doing so helps you reduce your overall interest outgo. However, lenders may set certain conditions for the same. For example, you may have to wait for a three-month or six-month lock-in period before prepaying or foreclosing your loan account. You may also have to pay a nominal percentage of your outstanding loan balance as “prepayment fees”. It’s crucial to read the loan agreement carefully to clarify these aspects.

Myth 7 – Personal loans damage your credit score permanently

Borrowers often ask: “Does a personal loan affect credit score?” Merely taking a personal loan never damages your credit score. What really matters is how well you manage it. Paying your EMIs on time can actually help improve your credit score. There may be a small dip in your credit score when you apply for the loan due to a hard inquiry. However, this dip is often temporary. Good repayment behavior has a stronger and lasting impact.

Myth 8 – Credit cards are always cheaper than personal loans

Credit cards allow you to avail of short-term credit for shopping and making payments. However, they are not always cheaper than personal loans. If you are unable to repay the full amount on time, the card provider may levy hefty interest. Personal loans, on the other hand, come with fixed EMIs and a clear repayment schedule. For planned expenses, a personal loan usually makes more sense than a credit card.

Benefits of understanding personal loan facts before applying

Knowing the facts and not believing personal loan myths can make a big difference in your approach. When you understand how personal loan interest rates, repayment terms, and eligibility criteria work, you can plan your loan application accordingly. It also helps in choosing the right lender who offers the best rates and repayment terms for your profile.

Awareness of common misconceptions prevents unnecessary fear or hesitation. It allows you to make more confident decisions. In short, being informed helps you borrow smarter, reduces financial stress, and ensures you see personal loans as a useful financial tool rather than a source of worry.

Key eligibility criteria for personal loans

Personal loan eligibility criteria may vary across lending institutions. They review some common factors, including the borrower’s age, monthly income, employment type, and credit score. Banks generally have more stringent eligibility rules than Non-Banking Financial Companies (NBFCs). Here are the usual guidelines:

  • Age: The applicant should be aged between 18 and 60 years.
  • Income: The applicant should have a monthly income of at least Rs. 15,000 to Rs. 20,000.
  • Employment type: Salaried employees with private/government companies can apply. Self-employed individuals with a minimum business vintage of three years can also apply.
  • Credit score: A score of 700 or above is required for easy approval.

How to apply for a personal loan smartly?

You can apply for a personal loan in the following steps:

1. Compare lenders

Start by comparing personal loan options from multiple lenders. Check for interest rates, processing fees, and other personal loan hidden charges.

2. Check eligibility

Make sure you fulfill the lender’s eligibility criteria before applying.

3. Apply online and submit the required documents

Apply for a personal loan online by filling out an application form on the lender’s website or mobile app. Upload the required documents in the correct order.

4. Wait for approval

Wait for the lender to verify your loan application and the documents submitted. Upon successful verification, you will receive loan approval.

Tips to improve your personal loan approval chances

Personal loan rejection can harm your mental as well as financial health. Here are a few tips that can increase your loan approval chances:

  • Maintain a good credit score by paying your loan EMIs and credit card dues on time.
  • Keep your credit utilization ratio low. Pay outstanding loans (if possible) and use your credit card wisely.
  • Make sure all documents, including ID proofs, income statements, and bank records, are accurate and up to date.
  • Avoid applying for multiple loans within a short period. Frequent loan applications can temporarily affect your credit score.
  • Choose your loan amount wisely. Lenders may reject your application if they feel that the loan amount is beyond your repayment capability.

Disclaimer

Personal loan terms and conditions can vary significantly from one lender to another. It is important to read all official documents carefully before applying. Do check for interest rates, processing fees, and other personal loan hidden charges. Being well-informed helps you make an appropriate borrowing decision and choose the right lending partner. It also helps you avoid common personal loan mistakes, such as borrowing more than the requirement and choosing the wrong tenure.

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FAQs

Do personal loans always have very high interest rates?

No, personal loans do not always come with very high interest rates. The rate depends on factors like your credit score, income, and repayment history. Different lenders may offer different rates. Thus, comparing multiple options can help you find a loan that is affordable and suits your needs.

Can I get a personal loan with a low credit score?

Yes, you can still get a personal loan with a low or moderate credit score. Lenders also consider your income, employment stability, and existing debts. While the interest rate may be higher, a stable income and proper documentation can help secure approval.

Is it possible to apply for a personal loan if I already have an existing loan?

Yes, having an existing loan does not automatically prevent you from applying for a new personal loan. Lenders check your income and current debt obligations. If your repayment capacity is sufficient, you can get approval. But it’s important to borrow responsibly to avoid financial strain.  

Does taking a personal loan permanently affect my credit score?

No, taking a personal loan does not permanently affect your credit score. A small dip may occur when you apply for a loan due to the lender’s hard inquiry. However, timely EMI payments can improve your score over time. Responsible repayment has a much stronger and more positive impact on your credit history.

Are personal loans only available to salaried individuals?

No, personal loans are not limited to salaried individuals. Self-employed professionals, business owners, and freelancers can also apply. The primary difference lies in the documents required. Instead of salary slips, self-employed applicants may need to submit bank statements, Income Tax Returns (ITRs), and business registration papers.

Can I prepay or foreclose a personal loan before the tenure ends?

Yes. Most lenders allow you to prepay or foreclose your personal loan account before its tenure ends. Doing so can reduce your overall interest outgo. However, you may have to wait for a specific lock-in period and pay a nominal foreclosure/prepayment fee for the same.

Are credit cards cheaper than personal loans for large expenses?

It depends on how you plan to use and repay. Credit cards offer interest-free credit for up to 30 days. However, the interest rates applicable after this period are usually very high. Personal loans, on the other hand, allow you to borrow large sums and repay them in structured EMIs over a fixed tenure. The interest rates are usually lower than those of credit cards.
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