Busting the major personal loan myths

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 online cash 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.