Do You Believe Any of These 4 Personal Loan Myths?
by Dana George | Updated July 21, 2021 - First published on Feb. 20, 2021
Some myths take on a life of their own. Here are four personal loan myths that are simply not true.
Are there repairs around your house that need to be taken care of? Been itching to remodel a room? Or, are you looking for a personal loan that allows you to consolidate high-interest debt? Whatever your reason for checking out personal loans, they can be a great resource for funds. The problem with personal loans is the number of myths that can scare borrowers away. Here are four of the tallest tales, followed by the truth.
1. Personal loans are always expensive
One of the most prevalent myths is that personal loans are always an expensive way to borrow money. Because you can apply for a personal loan through your local bank, credit union, or online lender, the competition for your business is fierce. That means most lenders want to be the one to tempt you into borrowing with their interest rate and loan terms.
Today, the best personal loan interest rate runs around 2.5% for the most highly-qualified borrowers. If you have a good credit score and plenty of income to cover the monthly payment, you can snag a personal loan for far less interest than you might pay for an auto loan -- and certainly less than you'll pay on a credit card.
2. Getting a personal loan is complicated
The personal loan application process is surprisingly simple. Here are the steps:
- Apply with several lenders. Make sure that the first credit check they run is "soft" (most are). A soft credit check means there is no impact on your credit score. If your credit check is satisfactory, the lender will let you know your interest rate and term options.
- Compare lenders. After comparing interest rates, closing costs, and any other fees, decide whether you would like to move forward with one of the loans. It's only at that point that the lender runs a "hard" credit check to verify your information is still accurate. This credit check will ding your credit score slightly, but your score is likely to rebound after several on-time payments have been reported to the credit bureaus.
- Provide additional information requested by the lender. This may include anything -- like information about other private loans, proof of income, and an account number where you would like loan funds deposited.
- Sit back and wait. Give the lender time to process your loan and disburse funds into your bank account. The time frame typically ranges from one business day to two weeks. If you need money quickly, be sure to ask about the timeline before deciding which lender is best for you.
3. Only borrowers with excellent credit need apply
One of the other personal loan myths that seems to hang on like barnacles to a ship hull is that only those with excellent credit need apply. The harsh truth is this: Anyone with a good credit score will be offered a better interest rate than someone with a low credit score. But that doesn't mean that poor credit bars you from eligibility. There are several great personal loan lenders for those with poor credit.
If you have a low credit score, you can count on paying a higher interest rate and fees than someone with excellent credit. But that doesn't mean a personal loan isn't right for you.
Let's say you have an auto loan and credit card debt with high interest rates. It doesn't hurt to apply for a loan. If you're approved for a lower rate than you're currently paying for those other debts, you could consolidate the existing debt into a lower-interest personal loan.
Even if you get a loan rejection, it's not the end of the road. If your application was for an unsecured loan, consider applying for a secured loan. A secured loan involves putting up something of value (like property or an investment account) as collateral. As long as the lender is confident in your ability to repay, they will likely reconsider your loan application.
Keep in mind that the lender can take possession of the collateral, sell it, and recoup its losses if you miss payments. Do not enter into a secured loan unless you are confident you can make every payment as agreed.
4. You can only have one personal loan at a time
As long as you have the income to repay more than one personal loan, there's no reason you can't take out another. Let's say you decided to remodel your kitchen a few years ago. You considered a home equity loan or home equity line of credit (HELOC), but because you have good credit, you got an unsecured loan for about the same interest rate.
You've made every payment on time, but now you're in a pickle. You're on the way home from a family trip to the Grand Canyon when your SUV breaks down -- and you're shocked by how much it will cost to replace the transmission.
This is when you call your original lender and apply for another loan to make car repairs. As long as your repayment capacity is the same as it was when you took out your last loan and your credit score is still high, there's nothing keeping you from carrying more than one unsecured personal loan.
Personal loan myths -- like all tall tales -- take on a life of their own. Next time you consider a personal loan, you'll know what to believe.
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