Personal Loan Myths Debunked

There are a lot of myths circling around personal loans. What’s true and what isn’t? Here’s a look at some of the most common misconceptions surrounding personal loans.

Only Banks Offer Personal Loans

It used to be that you could only apply and receive a personal loan by physically going into a bank. However, technology has changed the way this process occurs. You can now apply and receive a personal loan through an online lender. You don’t even have to leave your home to complete the process.

You Must Have Good Credit

Generally speaking, loans with competitive interest rates are typically offered to individuals with good credit. However, this doesn’t mean that you can’t still secure a personal loan if your credit is fair or poor. When doing research, you will find options that include both secure and unsecured loans depending on your credit score. If you have bad credit, you might be required to put up some kind of collateral in case you default on your payments. But even if your credit is less than ideal, there are still unsecured loan options available to you. Interest rates will likely be higher and you might encounter more expensive fees, but you have options!

The good news for all borrowers is that there is no shortage of lenders. You have the opportunity to apply with another company should you find the terms of a loan unfavorable. Do extensive research in order to find the best fit for your needs.

Personal Loans Will Hurt your Credit

Have you fallen prey to the narrative that taking out a personal loan will hurt your credit? An article written by Mia Taylor for finance.yahoo.com debunks this by explaining, “When used responsibly, personal loans can help improve your credit score over the long term. The key, however, is to repay the loan responsibly. Consistently making on-time payments and not missing any payments will help keep your score healthy. Applying for a personal loan prompts the lender to run a hard credit check to assess your overall financial health. This credit check will have a temporary, negative impact on your credit score. By maintaining your loan in good standing and consistently making on-time payments, the impact of the credit inquiry will quickly be outweighed by the positive impact of the loan itself.”

You Need Collateral

Many people assume that because you’re borrowing money, you need to put up collateral to secure the loan. However, personal loans offer secured and unsecured options. The above mentioned article goes on to explain the differences between the two. It states, “Secured loans, such as car loans or mortgages, are backed by collateral or assets. In the case of a car loan, the asset is the car itself, which can be repossessed if you fall behind on payments. The asset backing a mortgage is the house, which a bank can sell if you fail to remain current on your mortgage.

However, there’s no collateral requirement for unsecured personal loans. Be mindful that you will often get a higher interest rate than you would for a secured loan since there’s no asset for the lender to fall back on if you fall behind on the monthly payments.”

Personal Loans are Worse than Credit Cards

If you have good credit, you can likely qualify for a personal loan with a better interest rate than the average credit card. The interest rate for a personal loan hovers around 10% while the average rate on a credit card is around 19%. If it makes sense for you financially and if you want to save money in the long run, consider taking out a personal loan before opening a credit card.

You Can’t Get a Personal Loan if you have Other Loans

Some people assume that having other loans disqualifies you from obtaining a personal loan. However, this is untrue. Lenders are required to go through a review process to either approve or deny your application. They will consider factors like your income, current debt to income ratio and credit score to determine whether you can successfully repay the loan.

There are many myths surrounding personal loans. It can be hard to separate fact from fiction. If you ever have questions about whether or not you would qualify, don’t be afraid to contact lenders and start asking questions. Knowledge is power in this situation. The more research you do, the better. This will help you obtain the loan that best suits your needs.