Busting 10 myths about personal loans
Most of us can spot a money superstition a mile away. We’re not here to step on your gogo’s toes, but if your right palm is itching, it probably doesn’t mean that riches are coming your way (sorry). Keeping your wallet below your waist? It’s unlikely there’s bad financial juju looming over you, either.
But what about those sneaky money misconceptions that actually sound plausible? You’ve probably heard a few old chestnuts about personal loans, from their supposedly high interest rates to the intimidatingly lengthy application processes. We’re here to bring you the truth behind these popular myths about personal loans, so you can live your best financial life.
Myth 1: Personal loans have high interest rates
It’s a pretty common misconception that because personal loans are unsecured (there’s no home or car being used as collateral – see Myth 3), the interest rates are automatically higher. Nuh uh. Your personalised personal loan interest rate depends on your credit score and risk profile. The better your score, the lower the rate you’ll enjoy. There’s also a limit to how high an interest rate on a personal loan can go: the repo rate + 21%.
Myth 2: Ain’t nobody got time for that long application process
Thankfully, you no longer have to skip brunch on Saturday morning so you can get to the bank at 8am, fill in a phonebook’s worth of forms and promise the teller that you’ll name your first child after them. In fact, if you compare personal loans through BetterCompare, the process is quick and easy. Simply complete an online application and upload a few supporting documents, then we’ll find you offers from our trusted partners. Choose the one that suits you best, and we’ll connect you directly with the lender for the final steps.
Myth 3: You need collateral for a personal loan
Personal-loan lenders are not pawn shops. You don’t have to put up your grandma’s pearl earrings (or anything else) as collateral. What’s collateral? It’s something of value that you would have to give to the lender if you can’t pay back the money you borrowed. In the case of car finance or a home loan, it’s your wheels or your property. With a personal loan, the lender looks at your creditworthiness and how steady your income is before they decide to lend you the money. As long as you can prove you meet their criteria, you’re good to go.
Myth 4: Personal loans are only offered by banks
Fun fact: the bank is not your only option for getting a loan. Non-banking financial institutions, such as microloan organisations, are also able to help you out. Their criteria for application may even be more forgiving than the bank’s, even though their interest rates are still in line with what banks may charge. In fact, at BetterCompare we’ve partnered with multiple trusted non-banking partners so you have a wide array of options when looking for a personal loan.
Myth 5: Approval time is a nightmare
More good news: the sloth from Zootopia isn’t the one doing your paperwork. Approval times for your loan application can be extremely fast if you’re applying online. It can take between 24 and 48 hours for your application to be approved by a lender. You can do your part to keep things speedy by making sure your application is filled in correctly and that you’ve got all your supporting documents (like bank statements, proof of ID and so on) ready to go.
Myth 6: Low credit score = rejection
While it’s true that having a good credit score makes you more likely to have your application approved, a low credit score doesn’t automatically sucker-punch your personal loan dreams. Lenders will also take into account your employment status, income, age and loan history. Maybe you haven’t racked up years of good credit, but if you look like you’re in pretty good financial standing, it’ll definitely count in your favour. Remember, each lender has different requirements when it comes to a loan – yet another reason to compare offers before you settle down with one that may not match your energy. (You can also read more about how to secure a loan when you have bad credit.)
Myth 7: You can take out only one loan at a time
The truth? You can take out multiple loans if needed – but we wouldn’t necessarily recommend it. Each loan will come with its own initiation fee, service fees and interest rate, so you’ll probably end up spending more money (and admin hours) trying to pay back a bunch of little loans rather than one big one. In fact, we’ve got a whole heap of advice for you on how to use a personal loan to consolidate your smaller debts.
Myth 8: It’s better to max out your credit card than get a personal loan
Hard nope. First, look at the potential interest rates. Shop around for a personal loan with an interest rate lower than your credit card’s and you’ll end up paying back less overall. Next, get real with yourself about your debt-management behaviour. You may be better off borrowing a lump sum for a specific purpose and paying it off over an agreed-upon length of time. A credit card, on the other hand, is endlessly revolving. Having access to the bits of credit you’ve paid off isn’t always the best idea if you have, say, a bit of an online shopping problem.
Myth 9: Personal loans suck you into a debt spiral
Debt doesn’t go into beast mode on you unless you mismanage it (which, we’ll admit, is easy to do). The key is only to take out loans that you can afford to pay back along with your other monthly expenses. If you want to learn a little more before you take the plunge, we’ve got seven solid tips for how to manage your personal loan like a grown-up.
Myth 10: Personal loans are financially unhealthy
Are personal loans the deep-fried ice cream of your finances? Not at all. A personal loan can be a responsible way to invest in yourself or your future, and raise your credit score along the way by proving you can manage your debt like an adult. And if you compare loans with us, you can view different offers without affecting your credit score (which can take a knock if you actually apply for credit with multiple lenders while you’re shopping around).
You do you
Feeling that glow of confidence that comes from being armed with the truth? We hope so. Just remember that personal loans are exactly that: personal. Everything from your reason for applying to your interest rate and how well you eventually manage your debt comes down to your behaviour. We know you’ll do us proud.
Ready to look at your options? Head over to our personal loans calculator now.
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