The Truth About Personal Loans: 5 Myths You Should Ignore

A personal loan is a popular unsecured financing option for covering a variety of expenses. 

However, many prospective borrowers encounter persistent myths about these loans, which can create confusion and even deter them from applying. Understanding the truth behind these misconceptions is essential for ensuring a smooth and hassle‐free borrowing experience.

In this article, we will debunk five common personal loan myths to help you make a well-informed decision.

Myth 1: Only Salaried Individuals Can Avail of Personal Loans 

This myth likely arose from the belief that applicants must have a fixed monthly income to qualify for a personal loan.

However, leading financial institutions like SMFG India Credit offer personal loan to both salaried professionals and self-employed individuals.

Due to the varying nature of the income, the eligibility and documentation requirements differ slightly between these groups. Applications from self-employed individuals may also undergo greater scrutiny due to fluctuating cash flows.

Nevertheless, applicants with a strong credit score (preferably 750+), a low debt-to-income (DTI) ratio, and robust cash flows can expect a smooth approval process.

Myth 2: Personal Loans Have Very High Interest Rates 

Many individuals believe that an instant personal loan has unreasonably high interest rates. While it is true that personal loans may have slightly higher rates than secured loans (which require collateral to reduce the lender’s risk), many lenders still offer competitive interest rates. In fact, personal loan interest rates are often lower than those on credit cards.

More importantly, the interest rate you qualify for depends on various factors, including your credit score, income, existing debts, and the lender’s policies at the time of loan application.

Myth 3: Anyone Can Get a Personal Loan Instantly

Due to aggressive marketing campaigns from many lenders, most people are under the assumption that it is very easy to get a personal loan within minutes. While this may be true in some cases, for a large majority, getting the required funds may take upto 1-2 days, depending on their requirements, eligibility and the lender’s policy. 

Hence, applying online for a personal loan one must ensure that they check the lender’s eligibility criteria. For instance, many lenders are able to offer instant funds within minutes of submitting the application, but only as long as the applicant is an existing customer who qualifies certain criteria. Similarly, some lenders can process personal loan applications and disburse the required within 30 minutes to a few hours, providing that the customer matches their criteria in terms of income level, job stability, credit score, etc. On the same lines, lenders process online applications faster when the applicant’s PAN and Aadhaar card are linked to their mobile number, and their address is correctly updated. 

In cases where applicants have lower credit scores, higher levels of debt, or require physical KYC and document verification by lenders, lenders may need more time to process the application. Applicants who do not meet the lender’s eligibility criteria may also get rejected. Hence, it is advisable to check the criteria before applying for a loan. 

Myth 4: Borrowers With Existing Loans Cannot Apply

Lending institutions often evaluate your existing loans as part of the application process – but having an existing loan does not automatically result in rejection.

Lenders assess an applicant's debt-to-income (DTI) ratio, which indicates the portion of income used for existing loan repayments. As long as the ratio falls below the lender’s acceptable threshold, your application may still be approved provided you meet the overall eligibility criteria.

If your DTI ratio is slightly higher but within the threshold limit, lenders may still consider your application – though they might offer a higher interest rate, a lower loan amount or require a co-applicant with a stable income to reduce the risk of missed payments.

Myth 5: Personal Loans Are Only to Be Used for Emergencies

Another common misconception about personal loans is that they are only intended for emergencies. The belief likely stems from the notion that borrowing money should only be a last resort. 

While personal loans are indeed a valuable solution for urgent financial needs, their usefulness extends well beyond emergencies. In fact, many individuals opt for these loans to cover planned expenses like home renovations, higher education, or debt consolidation. Unlike some other types of loans, such as auto loans or home loans, there are almost no restrictions on the end-usage of personal loans. 

Conclusion 

The prevalent myths about personal loans can discourage potential borrowers from applying, even when they could be an ideal solution for their needs. However, most of these misconceptions are unfounded. 

By staying informed and separating fact from fiction, you can make sound decisions that align with your financial goals. Before applying, thoroughly research different lenders and evaluate your repayment capacity using a personal loan EMI calculator to ensure a smooth borrowing experience. If you have any doubts, don’t hesitate to contact your lender for clarification.

*T&C apply. Loan eligibility, loan terms, and loan disbursement processes are subject to the lender’s policy at the time of loan application.