Personal loans can help with consolidating debt at lower interest rates or managing expenses when you have a financial shortfall. However, there are numerous personal loan myths making the rounds and it’s important to separate fact from fiction if you plan to borrow. Here are the biggest personal loan myths debunked.
1. Myth: Personal loans always have high-interest rates
A common misconception surrounding personal loans is that they always carry high-interest rates. In reality, personal loans can be less expensive than other types of unsecured loans or even credit cards.
The key is having a good credit score that allows you to qualify for those lower interest rates. If you’re interested in getting a personal loan, it’s important to shop around with different personal loan lenders to see how rates compare.
2. Myth: You need good credit to get a personal loan
While a good credit score helps if you’re shopping for personal loans, it’s not a set in stone requirement to qualify. There are numerous lenders that offer personal loans to borrowers with less than perfect credit.
Aside from credit scores and credit history, lenders can also take into account your income, employment history, and debt-to-income ratio (DTI). Your debt-to-income ratio is how much of your income goes to debt repayment each month. If you have a solid income, consistent employment, and a low DTI, those could help offset a poor credit score.
There are some trade-offs to keep in mind, however. Getting a personal loan with fair or bad credit can affect the amount you can borrow and, more importantly, your interest rate. Again, that’s why it’s so important to compare interest rates from different personal loan lenders to find the most affordable option.
3. Myth: It’s hard to get approved for a personal loan
This is another of the biggest personal loan myths that’s easy to believe but entirely wrong. In fact, applying for a personal loan these days is as easy as filling out an application online and waiting anywhere from a few minutes to a few days for approval.
4. Myth: Applying for a personal loan hurts your credit score
If preserving your credit score is important to you, you may be hesitant about applying for personal loans. You may be worried about how a hard credit check may affect your score.
While hard inquiries can trim a few points off your score, you could glean more credit score benefits from getting a personal loan in the long run. If you’re using a personal loan to consolidate high-interest credit card debt, for example, that could improve your credit utilization ratio.
Your credit utilization ratio reflects the percentage of your available credit limit you’re using at any given time. Shifting credit card balances to a personal loan can free up available credit and as long as you don’t charge up new balances on the cards, that can work in your favor for credit scoring.
5. Myth: Banks are the only personal loan lenders
This is one of the personal loan myths that used to be true. But thanks to the growing popularity of online lenders, you now have more options than ever for getting a personal loan.
Working with an online lender to get a personal loan can offer advantages. The application process can be fast and easy and you may get instant or near-instant approval.
Once you’re approved, your personal loan may be funded in a matter of days. Online lenders can offer flexible repayment options and terms and potentially yield lower interest rates compared to brick-and-mortar banks.
