Myth #1: People with bad credit shouldn’t even think about getting a loan
Having a good credit score is crucial in securing a personal loan with a favourable interest rate. Once upon a time, it used to be that having a poor credit history could be a death blow to your hopes of getting your loan application approved. These days however, bankruptcies or missed payments do not carry as much weight as they used to.
If you’ve managed to maintain a reasonably good credit utilization ratio for the past few years, then you can still get your personal loan approved. This ratio is calculated by dividing your total credit card balances with your total credit card limit. Note that the interest rate or the amount you are allowed to borrow may differ.
You can get a more favourable interest rate by putting collateral for the loan, which will then reduce the rate considerably.
Myth #2: Your bank is always the best source for personal loans
You might be under the assumption that your bank is the best place to get a favourable personal loan, but that may not always be the case. Each bank or financial institution has different personal loan requirements and policies, depending on their risk appetite and their choice of strategy.
Some banks charge a higher interest rate to low-score borrowers, while others target only high-score borrowers at a low interest rate. Depending on your situation, this means that banks may not always be the best choice for you if you’re seeking a personal loan.
In recent years, a number of other alternatives such as online lenders and peer-to-peer (P2P) lenders have emerged, which has forced the market to offer more competitive interest rates and terms to clients. So don’t limit yourself to one source only. Make your queries thoroughly before you come up with a final decision.
Myth #3: You can only get one loan at a time
Not true! You are eligible to apply for more than one loan if you have sufficient cash flow, a good credit score and the right debt-to-income ratio. However, you must keep in mind that multiple loans mean increased interest rates and a high debt-to-income ratio. So think twice before taking this step since you might put yourself in a risky position if you are not good at managing multiple debts well. Remember, never bite off more than you can chew!
Myth #4: Loans are always cheaper than credit cards
Credit cards vs personal loans, which is cheaper? Credit cards are supposedly more expensive than personal loans, and most of the time, this happens to be the case. However, there are many types of credit cards these days, and there is actually one type of card that would trump taking out a personal loan.
Provided that you are borrowing a relatively small amount of money for a short period of time (preferably one year or less), making use of a 0% annual percentage rate (APR) credit card may actually be a better choice than taking out a personal loan.
In this way you can pay back the money without being liable to any interest payment, and you also need not worry about your low credit score. This is because credit cards for bad credit charges a rate between 24% - 30% whereas personal loan for bad credit scorers will be charged 36% on average.
Myth #5: Loans will never help you shrink your debt
It makes sense, right? Taking out more debt should only add to your existing debt pool, not help reduce its burden on you, or so the thought process goes. However, this may not always be the case. In the right circumstances (for example, market interest rates drop), you can refinance your existing loans by taking out a larger personal loan to pay off all your other loans and consolidate them under one obligation.
This does not necessarily reduce your debt total, but when used right, it can help you take advantage of fluctuations in interest rates or allow you to renegotiate the terms of your loan to one that is more favorable. This is also known as debt consolidation, and it can help you save a bunch on interest costs! You will remain with only one loan to handle with a comparatively low interest charge payable altogether.
It never pays to believe in myths or hearsay blindly. Personal loans can be a powerful financial tool for achieving your goals, and with this article, we hope that we have de-bunked some of the misconceptions you may have had about them!
READ MORE: The 5 Most Popular Reasons To Take a Personal Loan