| Overview: Personal loan myths prevent millions of Indians from accessing affordable credit. This guide debunks five major misconceptions about eligibility, credit scores, approval processes, and costs, helping you make informed borrowing decisions with real calculations and expert insights. |
Why Personal Loan Myths Still Mislead Borrowers
Recent RBI data shows that short-term personal loans, or EMIs, for gadgets have become more common in urban and semi-urban areas, marking a major behavioural shift in borrowing. Despite this growth, personal loan myths continue to mislead borrowers, causing them to either avoid beneficial opportunities or make costly mistakes.
These misconceptions range from believing that only high earners qualify to thinking that personal loans automatically damage your credit score. Understanding the reality behind these personal loan myths can help you make informed decisions about your financial future and leverage credit products effectively.
Myth 1: Personal Loans Are Only for Financial Emergencies
One of the most persistent personal loan myths suggests these funds can only address urgent situations like medical bills or home repairs. This couldn’t be further from the truth.
Personal loans in India are legally classified as unsecured credit with no end-use restrictions. You can use the funds for:
- Education and upskilling (professional courses, MBA fees, certification programmes)
• Home renovation and improvement projects
• Wedding expenses (venue, catering, jewellery, honeymoon)
• Debt consolidation to replace high-interest credit card balances
• Business investments (equipment, inventory, working capital)
• Travel and lifestyle goals (international trips, luxury purchases)
Consider Priya, a Mumbai-based marketing manager who used a ₹5 lakh personal loan to fund her digital marketing certification course. The investment boosted her salary by ₹25,000 monthly, making the loan EMI of ₹10,500 easily manageable while building her career.
| Pro Tip: Personal loans offer predictable EMIs and fixed tenures, unlike credit cards with revolving debt cycles. |
Myth 2: Only High-Income Salaried Employees Get Approved
Another damaging personal loan myth claims only borrowers with CIBIL scores above 750 can secure approval. Modern lenders, including Airtel Finance, evaluate multiple factors beyond credit scores.
Key Eligibility Parameters:
- Income stability: Consistent monthly earnings matter more than perfect scores
• Debt-to-Income ratio: Calculated as Total Monthly EMIs ÷ Net Monthly Income
• Employment history: Steady job tenure indicates repayment capacity
• Banking relationship: Regular salary credits and maintained balances
• Alternative data: UPI transactions, utility payments, rental history
DTI Calculation Example
Rajesh, a Pune-based software engineer, applied with a CIBIL score of 685:
- Net monthly income: ₹80,000
- Existing EMIs: ₹15,000 (car loan)
- DTI ratio: 15,000 ÷ 80,000 = 18.75%
Despite his moderate credit score, his low DTI ratio and stable IT job secured approval for ₹7 lakh at competitive rates.
Myth 3: Only Salaried Employees Qualify for Personal Loans
This personal loan myth excludes millions of self-employed professionals, freelancers, and business owners who often have higher incomes than salaried individuals.
Eligible Categories Beyond Salaried Employment:
- Self-employed professionals (doctors, chartered accountants, consultants)
• Business owners (traders, manufacturers, service providers)
• Freelancers (content creators, designers, developers)
• Commission-based workers (real estate agents, insurance advisors)
Documentation for Self-Employed Applicants
Instead of salary slips, alternative income proofs include:
- ITR for last 2-3 years
- Bank statements (6-12 months)
- GST returns and business registration
- Professional practice certificates
- Audited financial statements
Amit, a freelance graphic designer from Bengaluru, secured a ₹4 lakh loan by submitting his ITR showing ₹8 lakh annual income and consistent bank deposits. The digital application process made verification seamless without branch visits.
Myth 4: Personal Loan Approvals Take Weeks with Extensive Paperwork
Perhaps the most outdated personal loan myth involves lengthy approval processes and mountains of paperwork. Today’s reality is dramatically different.
Modern Application Timeline:
- Online application: 10-15 minutes
- Document upload: Digital copies via mobile app
- Verification: Automated checks within hours
- Approval: Same day for eligible applicants
- Disbursal: 24-48 hours to bank account
Required Documents (Standard List)
The standard list of required documents includes:
- Identity proof: Aadhaar card, PAN card
• Address proof: Utility bills, rental agreement
• Income proof: Salary slips, ITR, bank statements
• Employment proof: Offer letter, ID card
The eligibility process has been streamlined with e-KYC verification, eliminating physical document submission for most applicants.
| Fact Check: RBI guidelines encourage lenders to use alternative data for underwriting, benefiting borrowers with limited credit history. |
Myth 5: Personal Loans Always Damage Your Credit Score
The final major personal loan myth suggests that taking unsecured credit automatically hurts your CIBIL score. This misconception prevents people from accessing beneficial financial tools.
Actual Credit Score Impact:
- Application inquiry: Temporary 3-5 point reduction
• Timely repayments: Significant score improvement over time
• Credit mix diversification: Positive impact on score factors
• Utilisation management: Better than maxed-out credit cards
Credit Score Improvement Example
Kavitha’s credit journey with a ₹6 lakh personal loan:
- Initial CIBIL score: 720
- Post-application: 715 (inquiry impact)
- After 12 months of timely EMIs: 745
- After 24 months: 760 (excellent credit history)
Her improved score later qualified her for a home loan at preferential rates, saving ₹2 lakh over the loan tenure.
Score Monitoring Tip: Regular credit score checks help track improvements and identify areas for enhancement.
Interest Rate Calculation Formula
For any personal loan, use this formula to calculate total cost:
Total Amount = Principal + (Principal × Interest Rate × Tenure) + Processing Fee
Example: ₹5 lakh loan at 14% for 3 years with 2% processing fee
- Interest: ₹5,00,000 × 0.14 × 3 = ₹2,10,000
- Processing: ₹5,00,000 × 0.02 = ₹10,000
- Total repayment: ₹7,20,000
Making Informed Personal Loan Decisions
Understanding the truth behind personal loan myths empowers you to make confident financial decisions. Modern lending has evolved beyond traditional barriers, offering accessible credit to diverse borrower profiles. Whether you’re funding a wedding, consolidating debt, or investing in education, personal loans provide structured repayment with predictable costs.
The key lies in comparing offers, understanding terms, and choosing reputable lenders with transparent processes. Airtel Finance personal loans combine competitive rates with digital convenience, making the entire experience straightforward and efficient. Don’t let outdated personal loan myths prevent you from accessing the financial support you need to achieve your goals.
FAQs
1. Can I use a personal loan for investment purposes like mutual funds or stocks?
While personal loans allow usage for any legal purpose, financial advisors strongly discourage using borrowed money for investments due to market risks and guaranteed interest obligations.
2. How do personal loan myths affect my borrowing decisions?
Personal loan myths create unnecessary fear and confusion, leading to poor financial choices like avoiding beneficial credit options or accepting unfavourable terms from limited research.
3. What documents do self-employed individuals need for personal loan applications?
Self-employed applicants typically need ITR documents, bank statements showing regular income, GST returns, business registration certificates, and identity plus address proof for verification.
4. Will checking personal loan eligibility multiple times hurt my credit score?
Soft enquiries for eligibility checks don’t impact credit scores. Only formal applications with documentation submission trigger hard enquiries that temporarily affect your rating.
5. How quickly can I improve my credit score after taking a personal loan?
With consistent EMI payments, you can see credit score improvements within 3-6 months, with significant gains possible over 12-18 months of responsible repayment behaviour.
