Personal loans have become one of the most convenient financial tools that offer quick access to funds for various needs like medical emergencies, home renovations, education, and even travel. However, several myths about personal loans continue to mislead borrowers, causing unnecessary hesitation and confusion.
Many believe that personal loans come with excessive interest rates, require a flawless credit score, or are impossible to obtain with existing debt. These misconceptions often prevent people from making informed financial decisions.
Let’s debunk a few common myths about personal loans, explain why these beliefs exist, and provide factual insights to help you make the right call in terms of your borrowing options.
Table of Contents
Myth 1: Personal Loans Have Excessively High Interest Rates
Myth 2: You Need a Perfect Credit Score to Qualify
Myth 3: Personal Loans Are Only for Salaried Professionals
Myth 4: Applying for Multiple Loans Will Hurt Your Credit Score
Myth 5: You Can't Get a Personal Loan if You Have an Existing Loan
Conclusion
FAQ
Myth 1: Personal Loans Have Excessively High Interest Rates
Many people assume that personal loans are unaffordable due to high interest rates. This belief stems from past experiences when personal loans were considered high-risk, leading lenders to impose steep interest rates.
The Reality:
While personal loans typically have higher interest rates than secured loans (like home or car loans), they are not "excessively" high. The rates depend on multiple factors such as:
- Credit Score – A higher score can help you secure lower interest rates.
- Loan Amount & Tenure – Longer tenures may result in slightly higher rates.
- Lender Policies – Banks and NBFCs have different interest rate structures.
With improved financial regulations and competition among lenders, many financial institutions now offer personal loans at competitive rates, sometimes as low as 10-12% per annum for eligible borrowers. Interest rates vary based on financial credentials, but they are not as unreasonable as commonly believed.
Myth 2: You Need a Perfect Credit Score to Qualify
Lenders assess credit scores to gauge a borrower’s reliability. Many people believe that only those with a 750+ credit score can qualify, which creates fear among borrowers with lower scores.
The Reality:
While a good credit score improves your chances of getting approved, it is not the sole deciding factor. Many lenders offer customized loan options based on:
- Income stability – A steady source of income can compensate for a lower credit score.
- Existing debt-to-income ratio – If you have manageable existing debt, your credit score may not be a dealbreaker.
- Collateral or Guarantors – Some lenders consider co-applicants or secured personal loans.
A good credit score helps but isn’t the only requirement for loan approval. Lenders evaluate the overall financial profile rather than just one number. Even if your credit score isn’t perfect, alternative lending options exist.
Myth 3: Personal Loans Are Only for Salaried Professionals
Traditional banks used to favour salaried employees due to their stable income and lower default risk, making self-employed individuals believe they were ineligible.
The Reality:
Personal loans are available to both salaried and self-employed individuals. However, the eligibility criteria may differ:
- Salaried employees provide salary slips and employer details.
- Self-employed individuals submit business financials, profit & loss statements, and tax returns.
Many NBFCs and fintech lenders specifically cater to self-employed professionals, offering loan options based on income consistency rather than salary slips.
As long as you have a steady income source, you can get a personal loan, whether salaried or self-employed.
Myth 4: Applying for Multiple Loans Will Hurt Your Credit Score
It’s commonly believed that every loan application negatively impacts your credit score, leading to automatic rejection in future applications.
Loan inquiries are classified into two types:
- Soft Inquiries – When you check your loan eligibility yourself (doesn’t affect credit score).
- Hard Inquiries – When lenders formally pull your credit report for processing an application.
A single hard inquiry won’t drastically lower your score, but applying for multiple loans within a short period can be a red flag. Lenders may perceive this as financial distress and might hesitate to approve additional credit.
To avoid unnecessary hits to your credit score:
- Compare loan options using soft inquiries before officially applying.
- Space out loan applications over time.
- Apply only when necessary.
Multiple applications in a short span can indeed affect credit scores, but one or two well-planned applications won’t significantly harm your creditworthiness.
Myth 5: You Can't Get a Personal Loan if You Have an Existing Loan
People often believe that if they already have a home loan, car loan, or education loan, they won’t qualify for a personal loan. This personal loan myth stems from the assumption that lenders see multiple loans as a sign of financial strain, making it harder to get additional credit.
The Reality:
Lenders evaluate your debt-to-income (DTI) ratio, not just the number of loans you have. As long as you:
- Maintain a DTI below 40-50% (monthly loan payments shouldn’t exceed half your income).
- Have a stable income source.
- Have a good repayment history.
You can qualify for a personal loan alongside existing loans. Some lenders even offer top-up loans for borrowers who need additional funds but don’t want a new loan application. Having an existing loan doesn’t disqualify you; maintaining a healthy repayment track record ensures further loan approvals.
Myth 6: Personal Loans Are Difficult to Get Approved
Many believe that personal loans are difficult to get approved due to stringent eligibility criteria, creating unnecessary anxiety among borrowers. This personal loan myth likely arises because personal loans are unsecured, meaning lenders don’t require collateral. Without security, people assume banks and NBFCs impose overly strict rules, making approvals rare.
The Reality:
With advancements in digital lending, personal loans have become easier than ever to obtain, provided you meet basic eligibility:
- A stable income source (salaried or self-employed).
- A decent credit score (above 650-700 preferred).
- Valid documents like KYC, salary slips, and bank statements.
Fintech lenders and NBFCs offer instant approvals with minimal paperwork and quick disbursals, sometimes within hours. Meeting basic eligibility criteria makes personal loans easy to obtain, especially with digital lending platforms.
Myth 7: Credit Cards Are Cheaper Than Personal Loans
People assume that credit cards are cheaper than personal loans because of their interest-free periods on purchases. This leads to the belief that borrowing through a credit card is more cost-effective.
The Reality:
While credit cards are convenient for short-term transactions, they carry interest rates ranging from 30-40% annually if you don’t pay the full bill on time. Personal loan rates, in comparison, range between 10-24%.
For large expenses or long-term borrowing, personal loans are a cheaper and structured alternative to credit cards. Credit cards work for small, short-term expenses; personal loans are more affordable for structured, long-term borrowing.
Conclusion
Personal loans aren’t an exclusive privilege, nor are they a financial trap, they’re simply a tool. Like any tool, their impact depends on how wisely they’re used. You can make personal loans a driving force behind your goals rather than a source of anxiety by practicing sound financial management, preserving a high credit score, and borrowing sensibly.
