There are so many misconceptions about personal loans out there, it’s time we laid some of them to rest. When it comes to personal finances there’s a lot of myths and old wives’ tales that cause many of us to make improper decisions. Personal loans can be a good and cost-effective way of buying major assets in life, be it a first car or home renovation. They can also help you consolidate debts, so you don’t end up paying massive interest and fees. Not all personal loans are the same, which can lead to some confusion. We aim to clear this up in this post.
1. Going to your bank is the only option
It makes sense to go to your bank to get a personal loan, right? Your savings are kept there; even a credit card. However, you don’t have to go to your bank for a personal loan. In some cases, your bank may offer the least favourable rates and terms on the market. “Using a loan calculator or comparing loans with a broker can save you a lot of money,” says personal loan expert and Savvy CEO Bill Tsouvalas. “You can use your bank as a baseline but don’t automatically think you’ll get the best deal.”
2. Personal loan rates are insanely high
When people think of personal loans, they often confuse them with payday loans – payday loans are short-term loans that have effective interest rates of 50%-100% (usually collected as fees.) Personal loan rates are lower than credit card interest rates (per annum) and can be cheaper than alternatives like using home loan equity. Personal loan rates over five years can range from 8%p.a. to 18%; though if you shop around, you’ll find something towards the lower end.
3. Using your credit card is better than taking out a small personal loan
If you already have a credit card, putting a big purchase on your plastic seems like the path of least resistance. However, as we said earlier, a small personal loan may end up cheaper due to the fact your repayments are directly paying off the loan. Paying a credit card’s “minimum” will only increase your interest as time goes on. Credit card interest rates don’t usually start well into the double digits (11-12%p.a., if you’re lucky) while small personal loans have a set term and set repayments.
4. Taking out personal finance ruins your credit history
Applying for personal finance doesn’t put a black mark on your credit history as a matter of course. Making many applications and getting rejected does make lenders wary of your financial situation. If you are a responsible borrower and pay on time, your credit history will remain healthy.
5. You need an asset as collateral to take out a personal loan
Most personal loans are unsecured, meaning they do not require collateral in the same way a car loan or home loan does. This is especially helpful if you are young and have no assets. The only trade-off is unsecured loans have slightly higher interest rates compared to secured loans.