Personal loans are a great financial tool to meet unexpected expenses, fund big purchases, or consolidate debt. However, there are many misconceptions surrounding them that may prevent you from making informed decisions. In this blog, we’ll debunk the most common personal loan myths and separate fact from fiction.
Myth 1 - Personal Loans Can Only Be Used for Personal Expenses
Reality: Despite the name, personal loans can be used for almost any financial need, including:
- Medical emergencies
- Home renovations
- Child’s education
- Debt consolidation
- Travel and vacations
- Wedding expenses
Myth 2 - A Low Credit Score Means Loan Rejection
Reality: While a good credit score increases approval chances, it’s not the only factor lenders consider. Banks and NBFCs also assess:
- Your income and repayment capacity
- Existing financial obligations
- Employment history
Even with a low credit score, you can still secure a personal loan by:
- Choosing lenders that offer loans for low-credit applicants
- Applying with a co-applicant or guarantor
- Opting for a secured personal loan
Myth 3 - Only Salaried Employees Can Apply for Personal Loans
Reality: Personal loans are available for:
- Salaried employees
- Self-employed professionals
- Private business owners
- NRIs with a stable income source
Lenders evaluate income stability rather than employment type. Self-employed applicants can provide business statements and tax returns to prove their financial credibility.
Myth 4 - Personal Loans Have the Highest Interest Rates
Reality: Personal loans generally have lower interest rates compared to credit cards. Here’s a comparison:
Loan Type: Personal Loan
Interest Rate: 10% - 24% p.a.
Loan Type: Credit Card Loan
Interest Rate: 36% - 48% p.a.
Interest Rate: 10% - 24% p.a.
Loan Type: Credit Card Loan
Interest Rate: 36% - 48% p.a.
Additionally, borrowers can take advantage of:
- Seasonal offers
- Special schemes from banks and NBFCs
- Relationship benefits for existing customers
Myth 5 - Personal Loans Require Lengthy Approval Processes
Reality: With digital banking, personal loans can be approved in minutes and disbursed within 24-48 hours. Online loan applications now offer:
- Instant digital KYC verification
- Minimal paperwork
- Pre-approved loan offers for existing customers
Myth 6 - Personal Loans Are Only Available from Big Banks
Reality: Apart from large banks, many financial institutions provide personal loans, including:
- NBFCs (Non-Banking Financial Companies)
- Digital lenders
- Fintech platforms
Comparing multiple lenders can help secure better interest rates and flexible repayment options.
Myth 7 - You Can’t Get a Second Personal Loan If You Already Have One
Reality: You can apply for a second personal loan if you have a good repayment history and a stable income. Lenders consider:
- Your existing debt-to-income ratio
- Previous loan repayment behavior
Additionally, debt consolidation can help combine multiple loans into one with better terms.
Myth 8 - There Are No Tax Benefits on Personal Loans
Reality: Personal loans do not count as taxable income, and you may claim tax benefits if the loan is used for:
- Home purchase or renovation (under Section 24B of IT Act)
- Business expansion (as an expense deduction)
Myth 9 - You Need Collateral to Get a Personal Loan
Reality: Personal loans are unsecured, meaning:
- No collateral or security is required
- Approval is based on creditworthiness
However, for higher loan amounts or low credit scores, offering collateral may help in securing better interest rates.
Myth 10 - Taking a Loan Will Harm Your Financial Health
Reality: When used responsibly, a personal loan can actually improve your financial standing by:
- Consolidating high-interest debt
- Improving your credit score through timely payments
- Covering emergency expenses without liquidating investments
Busting Personal Loan Myths for Smart Borrowing
Now that we’ve debunked these common personal loan myths, you can make more confident financial decisions. Before applying, always:
- Compare multiple lenders for better rates
- Check your credit score and repayment capacity
- Opt for digital applications for faster processing
Still have questions about personal loans?
Reach out to JFinserv for expert financial guidance!