Debunking 10 personal loan myths
Borrowing money is a common part of life for many people, but lots of personal loan misconceptions still exist. Here, we debunk 10 personal loan myths, so you can better understand your borrowing options.
Myth 1: I’ll always get the advertised rate
When you shop for a personal loan online, you’ll see the APR (Annual Percentage Rate). This helps you compare borrowing costs.
The advertised APR is usually representative. This means that more than half (at least 51%) of successful applicants received that rate. But 49% could have received a higher rate.
Your actual rate depends on things like your credit score, loan amount and repayment term. So, always check the exact terms offered to you.
Myth 2: Personal loans are the most expensive way to borrow
Personal loans are not always the most expensive way to borrow. They can be a good choice when you want to borrow a larger amount at once, and you don’t want to use something you own, like your house, as a guarantee.
They might also have lower interest rates compared to credit cards or overdrafts. But remember, you may only be able to access the best rates if you have a good credit score.
Price comparison sites can help you compare options without hurting your credit score. Make sure to think about the pros and cons of each borrowing option before deciding which one, if any, suits your financial situation best.
Myth 3: I can only have one personal loan at a time
You can get more than one personal loan at a time if the lender approves it. Some lenders might not allow more than one loan per borrower, but others may. They’ll check things like:
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How you’re repaying your current loan
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Your credit score
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Your total debt
You could also apply with another lender. Before getting a second loan, think about how it could affect:
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Your budget
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Your credit score
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Your other commitments
Consider getting debt advice before deciding.
Myth 4: Applying for lots of loans helps me get approved
Applying for many loans in a short time can hurt your credit score. A lower score can make lenders less likely to approve you for borrowing.
Instead, think about using an eligibility checker. This tool shows if you’re likely to get approved without hurting your credit score.
Myth 5: A loan application will ruin my credit score
A new personal loan will cause a temporary dip in your credit score. That’s because the lender will do a hard search on your credit file.
However, if you manage the personal loan well and always make payments on time, this can boost your credit score over time. Because it helps build a good credit history.
On the other hand, if you make late payments or miss payments, this can hurt your score and make it harder to get credit in the future.
Myth 6: Only banks offer personal loans
Banks do offer personal loans, but they can have strict rules about who can get them. You can also look for personal loans from other places, such as:
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FinTech lenders: These companies use technology, like computer programmes, to help them decide who they’ll lend to.
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Credit unions: These cooperatives are owned by members, and typically aim to provide loans at low rates. You’ll usually need to become a member to access their loans.
Myth 7: It always takes a long time to get the money
Actually, many lenders advertise same day lending, and some say that they’ll pay out the money within a few hours of approval.
However, the speed can vary depending on the lender and if any extra checks are needed on your application.
For example, sometimes you might need to provide extra documents to the lender. And this could affect how quickly you’ll get the money.
Myth 8: I shouldn’t apply for a personal loan because I’ll just get rejected
A damaged credit score doesn’t always mean rejection. Some lenders specialise in providing borrowing for those with less-than-perfect credit scores.
And remember that your credit score is only one factor lenders look at. They’ll also consider other things like your income and outgoings.
But if you do have a damaged credit history, you may get offers with higher interest rates.
So, if you can, you may want to improve your credit score before applying.
Myth 9: Personal loans are only for those in financial trouble
Personal loans aren’t just for emergencies. They can be used for lots of things, including:
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Home renovations
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Weddings
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Car purchases
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Holidays
Personal loans can be a useful way to help cover bigger expenses without using savings. But remember to always make sure you can afford the repayments before applying.
Myth 10: I can always use my personal loan for anything
While personal loans can be used for lots of things, there are some restrictions. Lenders typically won’t approve a personal loan for:
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Starting a business
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Gambling
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A gift
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Paying household bills
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Funding any illegal activity
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A house deposit
Check with the lender if they have any restrictions on what you can use your personal loan for, if you’re not sure.
Key takeaways
There are many misconceptions around personal loans. Understanding the facts can help you choose the right borrowing choice for your situation.