One of the most popular types of financial products in India is personal loans. Their speed, flexibility, little paperwork, and use in almost anything make them attractive to almost anything – medical emergency, marriage, travel, home improvement, or even debt consolidation.

However, even being so popular, there is a lot of mythology, half-truths and old-fashioned beliefs around personal loans which tend to bewilder the borrower or even make them incapable of making smart financial choices. Most Indians continue to depend on word of mouth rather than on the knowledge of how modern lending functions.

This is a comprehensive 1500-word guide to dissecting the top myths in personal loans in India and revealing the truths you have to know before making an application. First-time borrowers or those who are intending to take a second loan need not make expensive errors thanks to this myth-busting guide.

Myth 1: Personal Loans are for high-income people.

The Myth

There are many borrowers with the thought that personal loans are only available to individuals with huge salaries or high-paying corporate positions.

The Reality

Income is also a significant factor, but it is not the sole factor taken into account by lenders. Banks, NBFCs and fintech lenders will today screen applicantsbased onf:

• CIBIL rating and credit report.
• Debt-to-income (DTI) ratio
• Employment stability
• Age and residence stability
• Banking patterns
• Past repayment behaviour

Even a person who has a monthly income of 15,000-20,000 is eligible with the right lender, particularly the NBFC and online lending applications.

Eligibility is augmented by high income, though it is not a prerequisite.

Myth 2: You should have an excellent CIBIL Credit Score to obtain a personal loan.

The Myth

Others believe that people who have a CIBIL score of 750 and above are the only ones who borrow money.

The Reality

Yes, a high score helps you better and provides you with lower interest rates. Numerous lenders lend money to individuals with:

• 700–749 → Good score, decent approval
• 650-699 Fair score; numerous NBFCs pass.
• Under 650- Loans can still be provided by some specialised lenders.

Banking is harsh, but NBFCs, fintech lenders, and computerised applications tend to rely on alternative data designs to assess borrowers.

An ideal score is not compulsory but beneficial.

Myth 3: Personal Loans are always charged extremely high-interest rates.

The Myth

Unsecured personal loans are usually considered to be too costly by individuals.

The Reality

Interest rates depend on:

• CIBIL score
• Income
• Employer category
• Loan amount
• Lender type

The interest rates of personal loans in India are usually 10-24 per cent. There are much better rates applied to borrowers with good credit profiles.

New borrowers can also get cheap rates in case they shop around among lenders,s provided that they have good financial behaviour.

Myth 4: Submission to Different Lenders will Enhance the Already Approved.

The Myth

People are surethat ife they are applied anywhere, such as a bank, NBFCs, fintech applications, somebody will grant them a loan.

The Reality

It is one of the most dangerous myths.

Any loan application will give you a hard inquiry on your credit report. Several hard questions within a brief time:

• Reduce your CIBIL score
• Send signals that you are credit hungry.
• Another way is to raise the chances of rejection.
• Never submit an application to more than one lender. 

Instead:

• Check your score
• Compare lenders
• Pre-check eligibility
• submit application to a maximum of two lenders.

Myth 5: Approved Personal Loans are Guaranteed.

The Myth

When a bank sends you a pre-approved loan SMS or message, many are of the opinion that it implies 100 per cent approval.

The Reality

Pre-approved loans are pre-approved using previous data, not up-to-date data.

Your loan can be declined if:

• Your CIBIL score has dropped
• Your income has decreased
• This is a high credit utilisation.
• You have new ongoing EMIs
• There is a risk in your banking habits.

Pre-approved offers incur a high probability of approval, rather than approval.

Myth 6: Personal Loans Ruin Your Credit Report.

The Myth

Customers tend to believe that borrowing a personal loan will instantly hit their CIBIL score.

The Reality

Personal loans do not drop your score. As a matter of fact, they can be used to score better when:

• You repay EMIs on time
• You maintain a low DTI ratio
• You avoid over-borrowing
• You establish a good repayment record.

Late payments of EMIs, defaults, and settlement of loans are what will hurt your credit card, but not the loan itself.

Myth 7: Banks are the only ones that provide reliable personal loans.

The Myth

There are borrowers who consider NBFCs or digital lenders to be insecure or not trustworthy.

The Reality

NBFCs today are:

• Regulated by RBI
• Offer faster processing
• Get lax eligibility policies.
• Loan out digital instantly.
• Loosen the lending to low-score borrowers.

Several NBFCs provide the customer segment with more competitive interest rates as compared to banks.

Fintech lenders have also automated the lending process, whereby one can get an approval within a few minutes.

Myth 8: Personal Loans are not available to Self-Employed persons.

The Myth

It is widely considered that only salaried people can take personal loans.

The Reality

Personal loans can also be acquired by self-employed borrowers. Lenders evaluate:

• The previous 12-18months’s ITR returns.
• Business bank statements
• GST filings (for businesses)
• Income consistency
• Business stability

Self-employed loans have also become more available with the digital underwriting systems.

Myth 9: Poor Credit Score Means Rejection.

The Myth

An individual feels that when he has a score of less than 7,00 he has been automatically disqualified.

The Reality

This will not ensure that you will be rejected, but it will lower your chances. You can still get approval if:

• You are in a good job or enterprise.
• Your income is high
• Your DTI ratio is low
• Your banking practices are very good.
• You borrow the loan from NBFCs that deal with low-score borrowers.

Also, the lenders rely on underwriting based on AI that examines cash flow, transactions, and employment information, and not CIBIL alone.

Myth 10: Loan Settlement Wipes in all dues and does not make any difference.

The Myth

Borrowers believe that it is clean to settle a loan (part payment rather than full repayment).

The Reality

Settlement of loans has a great negative effect on your CIBIL score since it usually goes down by 70-150 points.

The fact that your report will display settled as opposed to closed is an indicator of financial distress.

Lenders will not give new loans to customers who have settled previously. Although they are allowed, they are charged:

• Higher interest rates
• Lower loan amounts
• Strict repayment terms

Never settle except in the case of a great emergency.

Myth 11: The Lengthening Tenures are always good.

The Myth

People presuppose that the longer the tenure, the less EMI load, and that they are always better.

The Reality

Although it will reduce your monthly EMI, it will escalate your overall interest payment.

For example:

Comparison of 5 years loan at 12% and 3 years loan at 12%:

• 3-year interest: approx ₹97,000
• 5-year interest: approx ₹1,67,000

You end up paying ₹70,000 more.

The longer terms are only allowed when you are faced with cash flow limitations.

Myth 12: A Personal Loan is identical to a Credit card Loan.

The Myth

A credit card loan (or EMI conversion) is mixed up with personal loans by some borrowers.

The Reality

They are very different:

Credit Card Loan

• Higher interest rates
• Shorter tenure
• Ideal for small purchases

Personal Loan

• Lower interest rates
• Longer tenure
• Higher loan amounts

Being aware will allow you to pick the less expensive and more flexible one.

Myth 13: 0 Zero-Processing Fee Loans are the best.

The Myth

It is an automatic way of saving money among borrowers who believe that they are not required to pay processing fees.

The Reality

In some cases, lenders recompense with:

• Higher interest rates
• Prepayment charges
• Administrative fees
• Insurance add-ons

The low processing fee is good; however, the cost is more significantly influenced by the interest rate and the term of the loan.

Myth 14: Banks are the only ones who are capable of providing the best interest rate.

The Myth

Some people think that banks always have low rates.

The Reality

Several fintech lenders and NBFCs are providing:

• Reduced the cost of interest on a certain salary range.
• Faster disbursal
• Flexible eligibility
• Online identification and immediate processing.

Comparison of lenders should always be done.

Myth 15: The only thing you should take is personal loans in cases of emergencies.

The Myth

Others believe that personal loans are only to be taken as a last resort.

The Reality

Personal loans are flexible and can serve the following purposes:

• Debt consolidation
• Funding travel
• Education needs
• Medical emergencies
• Business expansion
• Home renovation
• Wedding expenses

There is nothing bad about a personal loan other than how you spend it.

Conclusions: Shortcut to Good Financial Choices: Myths Should Not Paralyse You.

One of the most useful and flexible financial instruments that can be used in India is personal loans. Myths and misinformation might be a source of fear, confusion or bad decision-making.

The truth is simple:

 There is nothing bad or good about loans. They are instruments,–and tools are instruments, and no more;–they are tools, and he who uses them is the man.

With the essential facts in hand, comparison of lenders, good credit score and responsible borrowing, you can use personal loans to enhance your financial security and finance your agenda effectively.