by Maurie Backman | Updated July 21, 2021 - First published on Oct. 22, 2020
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Interested in a personal loan? Be sure to get your facts straight first.
Maybe you have a home repair you can't cover. Maybe your car needs work. No matter the reason, it pays to consider a personal loan when you need cash. With a personal loan, you'll generally snag a lower interest rate than you'll find with a credit card. A personal loan will also usually have less of a negative impact on your credit score (assuming you pay it off on schedule).
Still, there's a lot of misinformation out there about personal loans. Here are three myths you shouldn't believe.
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When emergency situations arise, you need money in a pinch. You might assume a personal loan is out of the question. You might imagine it takes weeks to close on that type of loan. Not so: In some cases, you may get your personal loan funds within a few days of applying. It's definitely an option in an emergency. Granted, a personal loan will never be as fast as swiping a credit card on the spot -- but these loans can move very quickly.
When you apply for a mortgage, you must use your loan proceeds to buy a home. When you apply for an auto loan, that money can only go toward the purchase of a vehicle. But with a personal loan, you can borrow money for any purpose -- frankly, there doesn't have to be a good reason for it. If you want to borrow $3,000 to go shopping and your credit score renders you eligible for a personal loan, then you have every right to do so (though that's certainly not recommended).
When you apply for a home equity loan, the property you own is used as collateral to secure the loan. Your lender could force your home into foreclosure if you fall behind on payments. With a personal loan, there's no specific asset securing your loan. Your lender will likely reference your credit score to determine whether to approve you or not. And the higher your score, the more likely you are to get a personal loan.
But that doesn't mean you're completely out of luck if your credit score needs work. In fact, there are specialized personal loans for poor credit available. Of course, the lower your credit, the higher you can expect your personal loan interest rate to be -- but it'll still likely be less than what a credit card will charge you.
Many people shy away from personal loans because they're not familiar with how they work. If you need money, look into a personal loan. And even if you don't need money, it doesn't hurt to read up on them. That way, if you're ever in a pinch, you'll be better equipped to make a smart borrowing decision.
The Ascent team vetted the market to bring you a shortlist of the best personal loan providers. Whether you're looking to pay off debt faster by slashing your interest rate or needing some extra money to tackle a big purchase, these best-in-class picks can help you reach your financial goals. Click here to get the full rundown on The Ascent's top picks.
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