Personal loans are a great way for individuals to fund any expenses. Unlike home loans and auto loans, the amount availed through a personal loan can be used for any purpose. Another point of distinction between personal loans and other types of loans is that they are unsecured loans. This means that the borrower need not place any of his/her assets as collateral for the amount borrowed.
The fact that personal loans can be availed easily seems to lend some amount of apprehension from potential borrowers.
Many borrowers assume that a low credit score would result in the loan application being rejected. While an individual’s credit score is a factor that is taken into consideration when evaluating their loan eligibility, there are other factors that take precedence over a low credit score. Financial institutions factor in aspects such as the borrower’s income and their repayment capacity in combination with the individual’s credit score. However, it should be noted that the rate of interest charged for individuals with a low credit score tends to be higher than those individuals who have a higher credit score.
A number of individuals believe that the rate of interest on personal loans is generally very high. However, this is not always the case. In many instances, financial institutions and other lenders set interest rates based on the individual’s repayment capacity and credit score. Individuals who have a low repayment capacity are generally provided loans at higher interest rates. Borrowers with a good credit score and good track record of repayments can get a personal loan with an interest rate as low as 10.99% p.a.
Another common misconception about personal loans is that a lot of individuals assume that banks are the only financial institutions that offer personal loans. While banks do comprise a majority of the financial institutions that offer personal loans, there are a number of Non-Banking Financial Companies (NBFCs) that offer personal loans. In a number of instances where banks reject an applicant’s personal loan application, NBFCs and other digital lenders are willing to accept loan applications from these borrowers since their loan eligibility criteria is more flexible than those set by banks.
A number of loan applicants believe that they cannot avail a personal loan if they are already repaying an existing loan. This is not true and the same criteria is applied to sanctioning a second personal loan as is for the first one. Financial institutions accept loan applications based on the borrower’s repayment capacity and their current income. The loan application is either accepted or rejected based on the applicant’s capacity to repay the loan after taking into consideration existing EMI payments.
It is a common belief that only those individuals who have a steady flow of income are eligible to apply for personal loans. This is another myth about how personal loan applications are evaluated. For salaried individuals, having their loan application accepted is easier since there is a regular inflow of funds. However, individuals who are self-employed can also avail personal loans and the approval of the loan amount is based on the individual’s credit history. However, the amount that is sanctioned might vary.
Another myth about personal loans is that the borrower cannot repay the loan amount before the end of the loan tenure. The reason why most individuals believe this is because personal loans tend to have a much shorter tenure than other types of loans. However, borrowers can repay the loan amount before the end of the loan tenure. Most banks and financial institutions tend to have a minimum tenure for which individuals have to make the monthly EMI payments. Following the completion of the minimum tenure, borrowers can foreclose their loan after paying a certain amount as the foreclosure fee.
A number of borrowers believe that the processing time for most loan applications is very long and requires a lot of documentation. This may have been true several years ago, but now, applying for a loan and having the amount disbursed to your account can be done within 48 hours. Additionally, a number of banks have the instant loan option that disburses the loan amount to the borrowers account within minutes of submitting the application. Furthermore, a number of financial institutions are moving towards a paperless process that does not require the applicant to submit physical copies of any of their documents.
In 2019, availing a personal loan is no longer a long and arduous process. A number of lenders offer potential customers the facility of applying for a personal loan online and also inform customers of the amount that they are eligible to borrow based on their income.
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