10 Personal Loan Myths

Do you know that in India, the personal loan market has grown by more than 25% year-on-year, crossing Rs.10 lakh crore in outstanding debt by early 2025? As more people turn to personal loan for everything from emergencies to weddings, myths around them have spread just as fast. Whether it is fear of very-high interest rates or worries about long-term debt traps, misinformation may confuse smart financial decisions.

What Is a Personal Loan?

A personal loan is an unsecured credit facility offered by banks and financial institutions. That means you do not need to pledge any asset or collateral. The loan amount can be used for a variety of purposes such as medical emergencies, weddings, travel, education or consolidating debt. It is repaid in fixed EMIs over a tenure ranging from 1 to 5 years.

Why Is Personal Loan Required?

Personal loan acts as a financial cushion when:

• You face unplanned expenses like a medical emergency.
• You need immediate cash for an important event.
• You want to consolidate high-interest debt.
• You wish to fund planned personal goals without touching into savings.

It empowers borrowers with flexibility and quick access to funds without lengthy approval processes.

What Does 'Personal Loan Myth' Mean?

Myths are widely held but false beliefs. In the context of personal loans, these myths:

• Mislead borrowers into avoiding useful financial personal loan tool.
• Spread misinformation about eligibility, interest rates or consequences.
• May discourage responsible borrowing.

You may also like "FAQs on Personal Loan EMI vs Credit Card EMI"

Mentioned below are the most common personal loan myths. We will also detail the reality behind them.

Myth 1: Personal loans are only for emergencies

Reality: While personal loans are excellent for emergencies, they are also used for planned expenses like travel, home renovations, education or even starting a small business. Their flexibility is one of their biggest strengths.

Myth 2: Personal loans always come with high interest rates

Reality: Interest rates vary depending on your credit score, lender, income and loan amount. Some borrowers with strong credit histories secure loans at rates as low as 10–12% as compared to credit cards or business loans.

Myth 3: You must have a high income to qualify

Reality: Lenders assess your ability to repay, not just how much you earn. Stable employment, a good credit score and manageable debt levels play a bigger role than a fat paycheck alone.

Myth 4: Getting a personal loan will ruin your credit score

Reality: If you borrow responsibly and repay on time, a personal loan can actually improve your credit score. Defaults or late payments hurt your score, not the loan itself.

Myth 5: Credit cards are better than personal loans for short-term needs

Reality: Credit cards are convenient, but they often carry much higher interest rates, especially if you revolve your balance. Personal loans can offer fixed repayment schedules with lower interest in many cases.

Myth 6: Banks are the only source for personal loans

Reality: Non-banking financial companies (NBFC), digital lenders and fintech platforms have widened the playing field. These can offer quicker disbursal, lower paperwork and competitive rates, usually for younger borrowers or those with limited credit histories.

Myth 7: It is better to wait and save than take a loan

Reality: While saving is ideal, some opportunities or needs—like medical expenses or an urgent renovation—cannot wait. A personal loan can be a practical solution if it is budgeted wisely.

Myth 8: Once taken, you are stuck with the loan terms

Reality: Many lenders offer balance transfers or refinancing options. If rates fall or your credit profile improves, you may switch lenders for better terms after a few EMIs.

Myth 9: Personal loan processing takes forever

Reality: Thanks to digital onboarding and e-KYC processes, approval and disbursal can happen in as little as a few hours particularly from digital-first lenders.

Myth 10: One personal loan is enough; multiple loans are irresponsible

Reality: You can hold multiple personal loans as long as your repayment capacity allows. What is irresponsible is over-borrowing beyond your income or missing EMIs—not the number of loans itself.

Just like any financial product, personal loan is only risky when misunderstood or misused. With transparent terms, proper budgeting and a clear repayment plan, it can empower you—not entrap you. So if next time someone offers you a financial advice based on hearsay, share these facts with him.

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