The loan industry has been going through a lot of changes lately, powered by the advent of AI, FinTech and machine learning. Moving further and further away from traditional banks, loans are fueling a new financial revolution and put personal finance in a whole new perspective. In fact, the process of applying and getting approval for a loan has become so dramatically different that it has almost nothing in common with the experience the previous generations had.
Banks and financial institutions have more millennial clients, but their expectations regarding the lending process are often based on myths and misconceptions passed on from Gen X and Baby Boomers, for whom loans were anything but simple. At the same time, they don’t know how exactly to approach personal finance, because the practices that worked a few decades ago are no longer relevant or efficient in today’s climate. According to recent surveys, a growing percentage of millennials have no savings whatsoever and don’t know how they could manage in the event of an emergency. Most of these problems stem from a lack of understanding of personal finance, so it’s time to debunk the biggest myths on this topic and learn how to take informed financial decisions.
Myth #1: You can’t get a loan if you have no credit or bad credit
While this used to be true until the late 2000s, loan acceptance criteria have changed a lot after the economic crisis. Thanks to the skyrocketing evolution of AI and FinTech, lenders now have at their disposal advanced tools that help them determine fiscal risk without relying so much on the credit score and weighing in other factors as well, such as spending patterns. Today, your loan application can be approved even if you’ve just graduated college, are unemployed or have bad credit and there are many flexible financing solutions that can help you get out of a tight situation.
Myth #2: Only banks offer loans
Banks may be the traditional option, but they’re not the only ones who offer loans. In fact, the economic crisis has favored the advent of independent lenders and disruptive FinTech startups that revolutionize the lending process and offer flexible online solutions.
Myth #3: Loan application and loan approval take months
In the past, loan applications had to be assessed manually and, in lack of today’s modern tools, applicant background check could take weeks. Now, thanks to Big Data, lenders can assess applications very quickly and the average waiting time is no longer than 24 hours. This gives applicants enough time to look for other solutions if their request is denied. Additionally, thanks to aggregators and online resources like LoanStar, applicants can do their research in advance, comparing options to find out which loan is right for their situation.
Myth #4: You can’t apply for a loan if you’re self-employed
Contrary to popular belief, freelancers are no longer the high-risk category they once were. In the U.S., there were 57.3 million freelancers in 2017 and, according to an INACO analysis, there could be more freelancers than employees by 2050. Self-employment can be a lucrative career choice that shouldn’t raise a red flag, and lenders have come to
Myth #5: Lenders have poor customer support
This is another myth perpetuated by banks that no longer applies to the modern lending market. As competition is increasing, lenders are going the extra mile to help potential clients with personalized financial advice and advanced chatbots offer instant 24/7 support for more questions than you might think.
Myth #6: You need a large upfront deposit to get a loan
Loans with 20% deposits are not accessible for everyone, which is why more and more lenders are including options with as low as 5% deposit. Some categories, such as borrowers with stable jobs and high salaries, can even be eligible for loans with no deposit.
Myth #7: You should get a loan from your current bank
Although a loan from the bank where you opened a debit account may sound like a comfortable idea, it is often very limiting, especially if you are thinking about a long-term loan, such as a mortgage. Instead of going with your first option, you should compare the offers of various lenders and take advantage of loan comparison and calculator tools.
Myth #8: You should start saving when you earn more money
Most Millennials are aware of the importance of savings, but a worrying percentage of the assume that they should open a savings account only when they have a high-paying job. In reality, it is never too late for savings and the smallest amount deposited in your account will matter in the long run.
Myth #9: You shouldn’t increase loan monthly payments
Many borrowers would like to increase their monthly payments but fear that doing so might put their financial stability at risk, but, if you know that you can afford that amount, then you shouldn’t stick to small installments. Increasing your monthly payment can actually be a good thing, because it helps you pay off the loan faster.
Myth #10: You should pay off high interest debt first
Getting rid if the highest interest loan is the first solution that comes to mind when paying off debt, but it doesn’t always work, according to financial advisors. It might actually have the opposite effect, especially if you don’t have a high income. To avoid being overwhelmed by multiple sources of debt, it would be a better idea to pay off all your smaller interest loans first and then focus on the larger debts, such as the mortgage or the student loan.