3 Personal Loan Myths You Can't Afford to Believe

If you're considering signing a personal loan, you're probably in good company. As of the first quarter of 2023, U.S. personal loan balances were at $225 billion, according to data from TransUnion. That's a 26.3% increase from a year prior.

But while there are benefits to taking out a personal loan, there's also a lot of misinformation out there that might lead you astray. So it's important to get to the bottom of these big myths before committing to a personal loan.

1. A personal loan is always going to be the cheapest way to borrow

A personal loan has the potential to be your least expensive borrowing option -- but that won't always automatically be the case. Sure, you might end up with a much lower interest rate on a personal loan compared to carrying a credit card balance. But if you own your home, you may find that it's less expensive to borrow money by taking out a home equity loan.

Of course, you won't really know until you do some research and ask around for different rates. The point, however, is that you shouldn't assume that a personal loan is your best bet from an interest rate perspective. And in some cases, it could even pay to use a credit card for borrowing purposes to save money.

Let's say you need to borrow $2,000 to fix up your home, and you're eligible for a 0% introductory APR credit card. If your introductory rate will remain in effect for 12 months and you only have two more months of paying your $500 monthly auto loan, that means that shortly, you should have the option to bank that cash instead. That gives you plenty of time to knock out a $2,000 balance before 12 months are up.

Of course, you must be very careful when borrowing money in the form of a 0% interest credit card, since eventually, that introductory period will run out on you. The point, however, is that it may be a more cost-effective alternative to a personal loan under limited circumstances.

2. Getting a personal loan will wreck your credit

You may be hesitant to take out a personal loan for fear it will send your credit score plunging. But that shouldn't happen if you make your loan payments on schedule.

Applying for a personal loan might result in a minor hit to your credit score -- somewhere in the ballpark of five to 10 points. That sort of drop tends to happen any time you apply for credit. But if you're timely with repaying your loan, your credit score should not sustain any damage beyond that. In fact, making timely payments on a personal loan could actually help your score improve.

3. It's no big deal to fall behind on a personal loan since they're unsecured

When you fall behind on car payments, you risk having your vehicle repossessed, since your car is used as collateral for your auto loan. Personal loans aren't secured by a specific asset, so you might think that falling behind on one is no big deal.

But as just mentioned, your credit score might sustain serious damage if you fall behind on your personal loan payments. From there, it could become very difficult to borrow money again when you need to.

And also, if you completely blow off your loan, your lender might sue you. If the lender is successful and a judgment is entered against you, you may be subjected to wage garnishment so your lender can get repaid.

It's important to read up on personal loans before committing to taking one out. And it's just as important to get the real scoop on these myths so you don't sign a personal loan and then regret it after the fact.