Personal Loan Myth Buster
Myths are part of every folklore, and they spread in no time. Similarly, there are some myths associated with the popular credit option, Personal loans too. Today, we will bust all those myths and misconceptions.
But before that, let us understand what a personal loan is.
Personal loans are multipurpose loans and can be used for various purposes like weddings, renovation of the house, education, purchasing vehicles, gadgets etc. This loan is not offered against any security, and thus the risk involved for the lender is higher. The lowest personal loan interest rate hovers in the range of 11% to 18%.
Now that we know the basics of personal loan let us burst some popular myths and misconceptions associated with it.
- The rate of interest charged on a personal loan is very high.
Most people believe that the personal interest rate is too high and not within the common man’s reach. However, it is not true. Personal loans are unsecured loans, and there is a significant degree of risk involved for the lender. The lender charges an interest rate which is just slightly higher than than the credit with the collateral. As mentioned above, the interest rate on personal loan hovers in the range of 11% to 18%.
Moreover, interests on personal loans are dependent upon the CIBIL Score or creditworthiness of an individual. Higher the CIBIL score higher the chances of low-interest rate. CIBIL ensures the lender that the borrower is a diligent customer and repays the interest in time.
To understand the above case, let us take an example: Sunil and Sachin applied for Rs’ loan. 5,00,000 from X . Sunil has a CIBIL score of 750 (termed as an excellent score) whereas Sachin has a CIBIL score of 500 ( termed as a below-par CIBIL score). Then Sunil may get a loan with an interest rate of 11% while Sachin will have to resort to higher interest, that may go beyond 15%.
- Personal loans should be availed from banks only.
Another myth quite prevalent among the general public is that the loan must be applied only from banks. However, there is no harm in applying for personal loans from NBFCs and Digital lenders. Instead, unlike the nationalised banks, NBFCs and digital lenders have simplified and hassle-free loans disbursal process. Moreover, the NBFCs and Digital lenders’ eligibility criterion is flexible and offers most borrowers a scope to avail a personal loan.
- Personal loans can only be availed by salaried employees.
The multipurpose credit option, a personal loan can only be availed by salaried employees is a common misconception. Any category can avail a personal loan of the occupation. Self-employed and salaried professionals must present the income tax filing documents for applying for a personal loan.
- Lower CIBIL Score means no personal loan.
CIBIL score is one of the most important criteria for getting a personal loan approved. CIBIL Score or the repayment history of the borrower ensures the creditworthiness of a borrower. However, the opinion that lower CIBIL Score means no personal loan is wrong. CIBIL Score helps one secure a loan at comparatively lower rates and even without a high CIBl score, the borrower can get a personal loan approved from NBFCs and Digital lenders. The NBFCs and Digital lender will charge a slightly higher interest rate for lower CIBIL Score.
- No prepayment facility in the personal loan
As the interest rate on the personal loan is higher, it increases the interest burden, and one of the best ways to reduce the interest burden is through prepayment. Prepayment refers to a situation where the borrower pays all the EMIs before the loan tenure. Some people believe that there is no prepayment option available in the personal loan. However, that is not true. Prepayment facilities available in the personal loan and lender usually charge a penalty on prepayment. Even after the penalty, the prepayment option is an excellent way to reduce the interest burden.