Think you know everything about personal loans? We’re here to break the top 6 personal loan myths!
Personal loans have a bad reputation. Tell people you have a mortgage and few of them will blink – they might even congratulate you. But mention personal loans and the reaction will often be very different. Why is this so?
One reason could be that personal loans are (wrongly) associated with poor financial management or even unlicensed money lenders and loan sharks. Sensational stories about irresponsible borrowers going into debt with loan sharks to feed their gambling addiction don’t help either.
But the reality is a stark contrast. Personal loans are a financial tool like any other, and you can use them responsibly to your great advantage (“good debt”), or irresponsibly to your great detriment (“bad debt”).
Here are 6 lingering myths about personal loans that we’ll debunk right now.
Myth # 1: Personal loans are bad for my financial health
As we said earlier, personal loans are often viewed as negative for your financial health. After all, what can they do besides increase your debt load?
In fact, personal loans can be used as a debt management tool. This is called debt consolidation, and it means taking out a loan to pay off higher interest debt, like credit cards.
Consider that the effective interest rates for personal loans in Singapore are on average between 7 and 15 percent, while the going interest rate on credit cards is over 25 percent.
Consolidating your debt repayments as such can help you better manage your debt repayments. And you don’t just benefit from a lower effective interest rate. By streamlining your repayments, you can strategically tackle debt faster and even improve your credit score – a big plus for your financial health.
Personal loans can also come in handy in situations where the interest rate on the loan can be covered by investing your cash instead.
Myth # 2: You can’t get a personal loan if you don’t have a fixed salary
If you are self-employed, you might think that banks would not be interested in giving you a personal loan. This is not true at all, banks are much more flexible than you might think. With 8.4% of Singapore resident workforce classified as self-employed, banks understand that they must also meet the needs of this growing segment.
While most banks set the minimum annual income at $ 30,000, there are other options for those earning less than $ 30,000 per year. Credit Culture is one example – this is an approved lender that is open to anyone of any income level, as long as you have a job.
They are one of six fintech companies selected by the Justice Department as part of their pilot project to develop new business models for personal loans.
So, even if you are self-employed, your chances of obtaining a personal loan should not be different from those of an employee.
Myth # 3: If You Qualify For A Personal Loan, You Should Always Apply For More Than You Need
On the other hand, some people think that just because you qualify for a higher personal loan amount, you should get more than you need. The extra cash on hand never hurt anyone, did it?
Wrong. Asking for more than you need, regardless of your eligibility, is a bad financial decision. First, if the interest rates on personal loans aren’t as high as those on credit cards, they’re not low either.
READ ALSO : Should you repay your personal loan in advance?
Second, the more loans you take, the greater the impact on your credit score. And if you find yourself behind on payments because you’ve withdrawn more than you need, well, the impact on your credit score will be even worse. Find out if you really need to take out a personal loan with this checklist.
Myth # 4: You need to provide collateral to get a personal loan
If your only lending experience has been home or renovation loans, it may be a good idea to think that all loans require some form of collateral. This is not true when it comes to personal loans, most of which are unsecured meaning that no collateral is required.
Unsecured loans include, but are not limited to:
- Credit card loans
- Credit lines
- Personal loans (whether structured or variable repayment)
- Study loans
- Renovation and furnishing loans
Myth # 5: Don’t Bother Applying For A Personal Loan If Your Credit Rating Is Low
The truth is, your credit score absolutely affects your eligibility for a personal loan or any other type of loan. But you might be overestimating how much your credit score needs to drop before most banks disqualify you from personal loans.
One way around this problem is to ask for a lower amount and pay it on time. This will help you rebuild your credit score and increase your chances of qualifying for a larger amount in the future. Non-bank financial institutions such as Singapura Finance are also an option, but be prepared to pay higher interest rates.
We also strongly advise against using approved lenders as the interest rates are outrageous. It will only make your credit situation worse. Here is what you can do if you are looking for a personal loan with bad credit.
Myth # 6: Applying for a personal loan is a tedious and time-consuming process
Forms, forms and more forms, followed by a lot of waiting. This is the impression that a lot of people still have about the loan application process. While this may have been true in the past, it is no longer the case today.
Today, you can apply for most personal loans online through MyInfo without having to scan and download the relevant documents. Several banks such as DBS and Standard Chartered can also process instant approvals, which means you can get money fast the very next day.
This article first appeared in SingSaver.com.sg.