Getting a personal loan approved from banks can be more cumbersome than getting it approved from a licensed money lender. Banks approve loans only to borrowers with a good credit score, and they usually take a long to decide on a loan application. If you are planning to apply for a personal loan, you may want to know about misconceptions about this type of loans, so that you can make an informed decision. To know what the common misconceptions are, continue reading.
Before getting a loan, there are a few things that you need to consider. The credit card vs personal loan conundrum is in the minds of most borrowers. Many of them suppose that the repayment amount on a credit card is much higher than that on personal loans. However, borrowing smaller amounts of money for shorter periods on certain credit cards can prove less expensive. Moreover, personal loans charge 36% on bad credit, as opposed to credit cards that charge 24% to 30%. Personal loans are less expensive only when you decide to pay back the loan amount over a long period of time.
Contrary to some consumers’ perception, banks are not always the best place to get personal loans from. This is because the requirements for approving personal loans differ from bank to bank, depending on their financial strategy and risk appetite. They charge high interest rates to borrowers with a low credit score. A money lender company can be a much better choice because of its transparency with interest rates. Money lenders also make quick approvals and are not concerned about a marginally low credit score.
Many borrowers assume that getting a personal loan will only add to their present debt. This is not necessarily true, since, in situations like drops in market interest rates, existing loans can be refinanced. This can be done by getting a larger personal loan and paying off smaller loans. Debt consolidation can be a smart step because it helps to organise better and save considerable amounts of interest.
If you’re planning to buy a house or a car, do not take a personal loan at least 3 months before applying for the bigger loan. This is because housing or car loans take into account the debt servicing ratio (DSR). This ratio calculates what portion of your income would go into paying the loan back, apart from repayment from other loans.
It is true that having a good credit score helps secure a personal loan at better interest rates. However, nowadays, bankruptcy or missing payments are not as much of a factor in loan approval as they used to be earlier. Borrowers with good credit utilisation ratios are likely to get their personal loans approved. Another idea is to have collateral since it will reduce the interest rate. Money lenders usually overlook credit rating for smaller loan amounts.
It is a bad idea to borrow more money than you require when taking a personal loan. This is because you will have to pay an effective interest rate of 9% for money that you don’t even need.