Debunking 8 Personal Loan Myths and Misconceptions: Know the Reality!

You might be familiar with the concept of personal loans. But do you know there are a plethora of myths and misconceptions surrounding personal loans? Yes, you heard it right! Although personal loans have long been serving as a reliable and convenient tool for individuals looking for debt consolidation or immediate fund access, they are often surrounded by misconceptions that restrict individuals from making informed financial decisions concerning borrowing.

This article will delve deep into eight prevalent myths that have framed a false conception about personal loans in the mind of people. By debunking all personal loan myths, this article aims to empower the readers with accurate information and shed light on the actual truth beneath them.

What Is A Personal Loan?

Before delving deep into the myths, it is essential to ensure that you have a clear conception of personal loans. Personal loans are a kind of secured loan that is typically offered by various financial institutions such as credit unions, banks, or online lenders. They lend money to individual borrowers.

Compared to secured loans that usually involve the necessity of offering collateral like a car or house, personal loans are not secured by any assets. In fact, the lender merely evaluates the creditworthiness of the borrower, their income, as well as other relevant financial factors to determine the eligibility of a loan. The loan comes with a fixed rate of interest and a fixed repayment scheme, which may vary between one to five years.

The primary characteristic of this type of loan is that borrowers receive a good amount of money upfront, which can be used for various financial needs as well as personal expenses. The most common uses of personal loans involve:

• Consolidation of debts
• Medical bills
• Wedding expenses
• Home Improvements
• Funding unexpected emergencies
• Vacations

8 Common Personal Loan Misconceptions And Reality

As you now know what personal loans mean, it is time to address the common personal loan myth. Below are mentioned eight myths:

Myth 1: Personal Loans Are Only Meant For People Going Through Financial Trouble

Reality: Most people assume that there's no use for personal loans unless any financial difficulty arises. But in reality, personal loans are not solely meant for individuals with financial difficulties. Although they do offer a helpful solution for the consolidation of debts or managing unforeseen expenses, they are also used for other purposes like home improvements, funding education, financing a wedding, or covering the expenses for a luxurious vacation. Personal loans cater to a wide range of consumers with any kind of financial requirements.

Myth 2 : Personal Loans Come With Hidden Fees

Reality: It is also a common misconception that personal loans come with some hidden fees, which the lender is not clear about at the beginning. But this is not the case with every lender. Reputable lenders are always transparent regarding fees as well as their rate of interest. The common fees included are late payment fees, prepayment penalties, and origination fees. You can secure the utmost transparency by going through the loan agreement thoroughly or asking the lender to understand the total loan cost.

Myth 3: The Interest Rate For Personal Loans Are Always High

Reality: The personal loan interest rate usually varies on the basis of several factors. These factors include the credit score of the borrower, the policy of the lender, and the borrower's credit history. While the interest rates for some personal loans may be high, individuals entertaining a good credit score may qualify for competitive interest rates.

Myth 4: Collaterals Are Mandatory For Personal Loans

Reality: personal loans are usually unsecured loans, which means they do not require any collateral as security. Therefore borrowers are not bound to pledge any assets like a house or car to get access to a personal loan. Instead, the borrower's creditworthiness is accessed by the lender on the basis of common factors such as debt-to-income ratio, income, and credit score, among many more.

Myth 5: It Is Better To Pay Everything In Cash Rather Than Taking A Personal Loan:

Reality: While cash payments against purchases are ideal for avoiding any debts, it might not always prove to be a feasible option, especially for certain expenses. Personal loans offer a structured plan for repayment which allows individuals to spread out essential purchase costs or consolidate debts that involves a higher interest rate.

Myth 6: Applying For A Personal Loan Will Hamper The Credit Score

Reality: When you apply for a personal loan, the lender may perform a hard inquiry on your credit report. While this inquiry may have a minor and temporary impact on your credit score, the effect is usually minimal. What can significantly impact your credit score is how you manage the loan. Making timely payments and avoiding default or delinquency will help maintain or even improve your credit score over time.

Myth 7: Only Small Amounts Can Be Borrowed With A Personal Loan

Reality: This is one of the worst misconceptions. In reality, the loan amount you intend to borrow depends on various factors like the lender's policies, the borrower's income as well as creditworthiness. Borrowers having a strong credit profile are considered suitable for larger loan amounts.

Myth 8: It Is Quite Difficult To Qualify For Personal Loans

Reality: Personal loans are generally accessible to a wide range of borrowers. Credit unions and online lenders offer more flexible criteria, which makes personal loans more accessible for many individuals.

Conclusion

To sum up, it is essential to understand the truth behind all these myths. This will help you make an informed financial decision and use it as a valuable tool to serve the right purpose.