A personal loan is a great tool for meeting immediate fianancial requirements. You can use it for meeting major expenses or buying an asset. A big benefit of opting for a personal loan is that you don’t need to pledge collateral to avail of it. With an increase in lender options and digitization of the application process, getting a personal loan has become as easy as a tap on the phone.
However, there are still some common myths about personal loans that make borrowers, especially first-timers, apprehensive about availing of such debt.
One such assumption that people have in their mind is that personal loans do not offer the flexibility of prepayment. Compared to loans meant for specific purposes, like home and car loans, this type of loan has a shorter tenure and varies somewhere between 1 and 5 years depending upon the lender and agreed terms. The shorter tenure of personal leads many into thinking that it may not have an option of foreclosure.
In contrast, you can pay the pending loan amount to close your debt before the due date. Some lenders may charge a processing fee depending on the pending amount. Some lenders even forego this processing fee or prepayment charge if the borrower has completed a minimum tenure of paying the EMIs. If you intend to pay off the debt before the end of its tenure, it’s always advisable to discuss the terms and conditions of it with your lender at the time of availing the loan.
Another misconception about personal loans is that they have a high interest rate. Personal loans are usually cheaper than any other short-term loan option like a credit card. While the usual personal interest rates hover somewhere around 9 to 20 per cent in personal loans, the interest charged by credit cards can go 20 per cent upwards. Another advantage of personal loans over credit cards is that you can use it for cash transactions. Credit card companies usually do not encourage cash transactions. The interest charged for a personal loan also depends on the borrower’s creditworthiness and equation with the lender. They may be able to get a better deal depending on these factors.
There is usually no cap on how many personal loans a borrower can avail of simultaneously. It all depends on their creditworthiness and repayment capacity. The lenders assess the repayment capacity and credit score while approving and rejecting the loan.
The higher the credit score, the better the chances of loan approval. Unlike earlier times when banks were the only source of institutionalized personal loans, there are multiple options like non-banking financial companies and digital lenders. A borrower, who is not able to avail of a loan from a bank due to a lower credit score, may approach NBFCs. These finance companies may be willing to take greater risks and bet on a borrower with a lower credit score if they tick other criteria. In such cases, the interest charged from the borrower tends to be higher than usual.
The market is flooded with multiple options of personal, having their own merit and benefits. Good research will enable the borrower to get a better deal with more flexible repayment options.