There are many common myths and misconceptions about taking a personal loan. Unless you understand how lending works, you can make a bad decision and choose the wrong lender or the wrong option.
You may consider word-of-mouth and personal opinion of people you trust. If you hear that everyone recommends the services of a particular credit provider, it is a good indication that approaching them for a loan may be a good idea.
Remember however that every situation is different, and what worked for other people does not have to work for you.
Also if you are talking to a loyal member of a credit union, they may recommend their services although they never shopped around or compared them to other credit providers.
Like with any important information you must use credible sources and double-check what you read or hear. It can be very upsetting to learn that you are paying higher rates or even got your loan rejected because you did not do your homework.
What are the common personal loan myths?
1. All loans are the same
It can be confusing. Payday loans versus personal loans is a good example. Both types are personal loans (although the funds can be used to help with an emergency problem in your business cashflow) but there are some differences that can make one or the other a better option depending on your needs.
The different lenders may use different eligibility criteria, apply different credit rates, and have different terms. Additionally, some loans have different names – short-term loans, cash loans – which adds to the confusion. The trick is to research the loans prior to applying and never assume that they are the same. You may potentially lower your chances of getting your loan approved or lose money paying excessive rates and fees.
2. If you need a loan you should start with your bank
Approaching your current bank sounds like the easiest thing to do, especially if you built a solid credit history with them. It does not mean your bank will offer the lowest interest rate and the best terms. Consider other credit providers, such as credit unions, peer-to-peer lenders, and online lenders. In Australia, they are all regulated by ASIC and must comply with the responsible lending conduct obligations so finding a trustworthy credit provider is quite easy. If you shop around, you may find better options so even if you decide to apply at your bank, you will be able to negotiate better rates with them.
3. Applying for a personal loan will hurt or even ruin your credit score
Applying for a loan, getting it approved, and repaying it on time with no late or missed payments is one of the best ways of improving your credit score. Applying for several loans at the same time can hurt your credit score as each application involves a hard credit check and is reflected in your credit history. Applying for another loan when you already have one can also result in higher rates. The good news is, even if those checks will not look great on your credit history, they will not make a huge negative impact on your credit score, the way defaults do.
4. Using your credit card is a better option than taking a personal loan
It depends on your financial situation, the amount you need, how you are going to repay it, and other factors. A personal loan from a bank typically has a lower interest rate than a credit card (it may depend on your credit score), and it is cheaper in the long term. If all you need is a small amount that you will be able to pay off quickly, using a credit card may be a good choice but for bigger purchases taking a loan will most likely be a better option.
5. You cannot take a loan unless you have some security
Personal loans can be secured or unsecured so it is not true that you must have an asset as collateral to have your loan approved. According to ASIC, you can offer an asset, such as your car, as security or collateral for the loan. If you cannot make your repayments on time, the lender can repossess your car and sell it to get money back. You can also apply for an unsecured loan, which is riskier for the lender so usually carrier higher credit rates. To get the loan approved you must have a good credit rate and meet other requirements.
6. Applying for a personal loan is complicated and time-consuming
The process of applying for a personal loan is in most cases straightforward and easy to follow. It is even easier and quicker if you understand how lending works, and have all the information prepared and ready to go. Most credit providers have an online application, and you may have your loan approved and funds available in your bank account within one business day.
7. Applying for several loans at the same time is the quickest way to get your loan
Some people apply for several loans at the same time to save time. Others want to see who will give them the best deal. But it is not a good idea. In fact, applying for more than one personal loan is a mistake and can work against you. Most credit providers frown upon multiple loan applications. When the lenders complete a hard check, it is recorded and show in your credit history, lowering your credit rate. Credit providers are able to see that you applied for other loans and that can make you look like you are in financial trouble and need money desperately, which raises red flags and increases the odds of getting rejected.
To maximize your chance of getting your loan approved, pay off any debts that you have, have a steady income, build your savings and your emergency fund. When you are ready to apply for a loan, use the above tips. Research the lenders and apply for one loan at the same time. Get your information from credible sources, check what types of loans are available, and compare rates and terms to get the best deal.