Are misconceptions around personal loans giving you concerns? Having clarity on some of the myths about personal loans may help you make a decision.
1. Personal loans are only for emergency:
Some people believe that personal loans are only meant for emergency purposes. However, personal loans can be used for a variety of purposes aside from emergencies. Some of the other uses may include bill consolidation, purchasing a car, home improvement or taking a vacation. Personal loans are useful for various purposes regardless of your financial situation, if you meet the stated requirements as determined by each individual financial institution.
2. You need perfect credit to get a personal loan:
Most people mistakenly believe that taking out a personal loan requires having excellent credit, either in terms of score or history. This isn't always the case because those with less than perfect credit may be able to get a personal loan, depending on other eligibility requirements. The borrower must be able to prove that they are able to pay back what they want to borrow. Although credit score and history will likely play a significant role in the loan approval process, it doesn't have to be perfect.
3. Personal loans are only used for large projects:
Personal loans are not only used for large expenses such as home improvement projects, debt consolidation or funding a wedding. Personal loans may assist with expenses such as auto maintenance and repairs, medical bills, and home appliance repairs or replacements.
4. Multiple credit checks won't affect your credit score:
It is a regulatory practice for lenders to pull your
credit report during the loan application process. This is primarily for verification and accreditation purposes. There are two main types of credit pulls: soft and hard. While a soft pull during the pre-qualification stage may not impact your credit score, a hard credit pull may impact your report and multiple pulls may temporarily affect your report.
5. Paying off your loan on time does not attract any fees.
Paying off your loan before the end of the loan tenure surely sounds good, especially if you want to save on interest costs. It is also important to understand the terms and conditions, particularly the associated fees if you choose to pay off the loan. Some financial institutions may assess an additional cost, also known as pre-payment penalties, if you pay off your loan early. There are several lending institutions that do allow early payoff with no penalty. You just have to do your research to find the right lender for you.
6. You’ll have to put up collateral
Not all personal loans require collateral. Some lenders may offer unsecured loans, which don’t require you to put up the title to your car, household goods, or your home as collateral.
7. Interest rates on personal loans never change:
This isn’t necessarily true—interest rates may change depending on market conditions or other factors. Many personal installment loan lenders offer fixed interest rates and often promote that as a key loan feature on their websites and advertising.
In summary, personal loans can be a useful financial tool if handled with the right knowledge. In contrast to being a quick fix for money issues, personal loans are a tool that should only be utilized after thorough thought and preparation. Understanding a personal loan's terms and conditions is key when finding the right lender and entering into a personal loan agreement.