5 Personal Loan Myths to Ignore
Loans always get a bad rep when in reality they are an incredibly useful credit resource. This is especially true in cases where you need a large sum of money quickly and don’t have liquid cash on hand. For example, a wedding expense or an emergency fund. Yet most people correlate personal loans to bad financial management and are generally hesitant to utilise loans. This could be because of deep-rooted misconceptions surrounding credit, misinformation or a lack of financial literacy.
For example, people are hard-pressed to believe that debt consolidation loans, a form of personal loan, can help improve your credit score. If you choose to dig a little deeper into that, you’ll know that this has been considered to be widely accepted advice to eliminate debts.
In this article, we’ll disprove 5 such personal loan myths!
Myth 1: Personal loans come with high borrowing rates
Most loans come with borrowing rates but personal loans are not the ones with the highest borrowing rates. Here’s the thing about them. When scouting online for loans including personal loans, they come with something called an Annual Percentage Rate (APR). These are usually advertised but there’s no guarantee that you can take a loan at that rate. Some will have to pay higher, some will be lucky enough to get the loan at the advertised APR.
This is because there’s no ‘one size fits all’ for loans when everyone has a different credit score and loan affordability. You know what your credit score is but what is loan affordability? Simply put, loan affordability is a measure to determine a borrower’s loan repayment ability against a measure of time and whether they can repay the loan amount in full.
Myth 2: Your Bank is your best option for a personal loan
Even the most trusted banks cannot promise you lower interest rates just because you have an account there. It is wise to consider other options like non-profit lenders and credit unions that could offer better rates. They’re also known to offer higher savings interest rates.
Traditional banks have the added pressure to make a profit. Credit unions and non-profit lenders on the other hand are not bound by shareholder tactics for profit generation. Instead, they offer low fees, low interest, and high savings offers on personal loans, a much better deal for the financially savvy.
Myth 3: There are limits to taking Personal loans
People falsely believe that taking a personal loan is limited to a one-time emergency use. Not only is this notion misplaced, but it’s also narrowing the scope of personal loan usage.
Personal loans can be taken for a wide range of purposes – Home renovation/repairs, Education, debt consolidation, wedding expenses, foreign holidays, medical expenses/hospitalisation, and a new car.
Personal loans are quickly accessible and finding credible lenders online is easy. Therefore it becomes a rather convenient way to get credit especially when you need a large sum in a short time.
You can also have multiple personal loans. For example, you could take 3 personal loans, one each for wedding expenses, home renovation and buying a new car. The key thing to remember is that you don’t miss repayments on those as skipped payments can impact your credit history.
Myth 4: Personal loans can be used for anything!
This closely follows Myth 3. While personal loans do have a wide array of applications, there are also an equal number of situations where personal loans won’t be approved even if you apply.
Credit sources come with heavy penalties for payment defaults. All the more reason to be taking a personal loan for the right reason. Lenders will disapprove your personal loan application for something like gambling for example or buying an expensive car on your 4th personal loan. Personal loans come with the caveat of responsible usage.
Myth 5: A Bad Credit History means you are disqualified from a Personal loan
Thankfully, this isn’t true. A bad credit history does not automatically disqualify you from getting a personal loan. Most financial pundits consider it wise to take a low-interest loan and pay off your high-interest debts. A personal loan is generally considered a safe option to do that. What matters is that you don’t skip your repayments and are on time, which funnily enough improves your credit history. Credit Rating Agencies (CRAs) consider whether you are punctual with loan repayments. As long as you have that sorted out, you don’t have much to worry about.
Conclusion:
Personal loans are a credit source that has applications well beyond emergencies. But like any other loan, it needs to be used sensibly.
Always do your due diligence before taking a personal loan by reading up terms & conditions carefully.
It’s also good to do an online check of credible lenders and institutions to prevent fraud. We hope this article has shed light on personal loans and improved your understanding of them.