As with many financial topics, there are numerous myths surrounding personal loans. Many people hear these myths or untruths and make poor decisions based on something that is not fact. Many myths have been around for so long, a lot of people insist they are fact.
In order to assist you in making an informed decision, based on facts, we will dispel 10 of the most commonly believed myths regarding personal loans.
Myth: I must have collateral to get a loan
While all lenders are more comfortable when you have collateral, it is certainly not a requirement for a personal loan. All banks and other financial institutions offer a range of unsecured personal loans.
They will look at your income, your affordability and your credit history (from your credit report) to determine the amount of money they are prepared to lend you and this information could also affect the interest rate they offer you.
Myth: Personal loans are difficult to apply for
In days gone by, one would normally have to sit in front of your bank manager and go through a rather rigorous interrogation in order to apply for a loan.
These days, thanks to modern technology and the internet in particular, applying for a loan has never been easier. It can be done online in just a few minutes. Many companies also allow you to apply over the telephone.
Myth: Personal loan approval takes weeks
kAgain, this is simply not true. So long as you have a reasonably good credit rating and provided all the information correctly, most institutions will give you an answer within a few hours; others take a day or two at the most. If there are any discrepancies, it might delay the process slightly while these are sorted out.
Myth: If your credit rating is bad, it is impossible to get a loan
The loan industry is highly competitive and there are many companies offering personal loans. While a poor credit history will not help your chances, it does not preclude you from getting a personal loan.
The application might take slightly longer to process and the chances are your interest rate will be higher than it would have been if your credit score was great but, unless your credit report is really bad, you will probably still be able to get a loan. The amount they are prepared to lend you might also be affected. If you pay the loan well, they will more likely to lend you more money in the future.
Under certain circumstances, such as if you are under debt review, for example, you will not be allowed to apply for a loan.
Myth: Your own bank is the best place to get a personal loan
As previously stated, the loan market is highly competitive and there are many companies fighting for business. This works to your advantage.
If you have a good relationship with your bank and your account is in good standing, I would certainly recommend approaching them to see what they are prepared to offer. I would also recommend shopping around with a number of other banks or financial institutions and compare the offerings. Just make sure you read the fine print and look out for additional charges and fees.
The internet is a good place to shop around and get an idea of the different options available to you.
Myth: You have to take life cover from the loan provider
Most loans will require that you have life cover to provide for the loan in case you die before the loan is paid in full. Most companies will build it into to their loan agreement and try to make you take the insurance from them.
While it is perfectly acceptable and sensible for them to insist on life cover, they can not demand that you take their product. Most loan providers will make it very difficult but you can use existing cover or get life insurance from the company of your choice, to cover the outstanding amount in the event of your death.
Myth: Pay off all loans and debts before saving for retirement
This is more of a myth about retirement planning than personal loans but many people believe they should be debt free before saving for retirement.
The truth is, the majority of people will never be totally debt-free. Retirement saving is a long term goal and debts will come and go. The sooner you start saving for retirement, the better. One of the advantages of saving in a specific retirement product, such as a retirement annuity, is that the money is protected and can not be taken away from you. So, even if you get into major financial difficulties, your retirement savings are protected.
Do not wait until you are debt free before saving for retirement, start as soon as possible, even if you have outstanding loans or debt.
Myth: You can only have one loan at a time
Many people believe that you can only have one personal loan at a time. This is not true. You can have as may as you can afford. With each individual loan, they will look at your credit history and they will also look at your income and monthly expenses.
By comparing your monthly income to your monthly expenses and debt commitments, they will determine your affordability. If you can afford an additional loan and your credit history is in good standing, you will qualify for additional loans.
Myth: Credit cards are cheaper than personal loans
This is neither true nor false. It all depends on the interest rate that each one charges and any additional costs or charges.
In some cases, it might be less expensive to finance something on your credit card while in other instances; a personal loan might work out cheaper.
You should be able to check both costs online or by contacting the loan and credit card companies directly. Remember to look at the total cost over the period of the finance, not just the monthly cost of each one.
Myth: Look for the loan with the best interest rate
The interest rate on your loan is certainly one of the most important factors but it is not the only thing you need to look at. Different financial institutions have a range of additional charges that they levy. These range from initiation fees to monthly service fees as well as credit life insurance. If you are comparing two or more loans, look at all the additional costs over the period of the loan. It is quite possible for one with a lower interest rate to work out more expensive than a loan with a slightly higher rate but with lower add-on costs.
People often spread these myths or untruths, normally with the best intentions in the world. Always check for yourself and investigate further to make sure for yourself.