Considering a personal loan? Avoid these 4 myths

Personal loans are fixed-interest rate, fixed monthly installment loans that can be used for almost any loan purpose. They are commonly used for debt consolidation, emergencies, home improvement, to pay off debt and more. In addition, most personal loans are unsecured – unlike a home loan or auto loan – meaning you don’t have to pledge an asset to take one out.

Understanding the ins and outs of personal loans can take some time. If you don’t fully understand how they work, you might fall for some common personal loan myths. Keep reading to learn what four of them are.

WHAT TO DO BEFORE APPLYING FOR A PERSONAL LOAN

4 personal loan myths you should ignore:

1. Personal loans cost too much
2. Personal loans won’t work in an emergency
3. Personal loans are only for top-tier borrowers
4. Applying for personal loans is difficult

Myth 1: Personal loans cost too much

Depending on your creditworthiness and income, personal loan rates can be over 30%. But, average interest rates for personal loans are usually lower than the average interest rates for high-interest products like credit cards. For example, the average credit card interest rate was 14.75% this past February, while the average 24-month personal loan was 9.46%, according to the Federal Reserve.

Myth 2: Personal loans won’t work in an emergency

Unlike mortgage loans, personal loans don’t require you to go through a closing process after the loan application. Because of this, in times of emergencies, personal loans can provide you with speedy access to the cash. For example, some lenders can deposit the loan amount in your bank account the next day after you sign the loan agreement.

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Myth 3: Personal loans are only for top-tier borrowers

While it’s true that the best personal loan rates and largest loan amounts typically go to borrowers who have good to excellent credit scores (670 or above) and high incomes, it’s a common misconception that personal loans are only for top-tier borrowers.

Some lenders offer personal loan options for borrowers who have less-than-stellar credit scores and lower incomes. For example, some lenders approve applicants with credit scores as low as 580, a fair score on the FICO credit scoring model. Although you’ll most likely receive a higher interest rate with a poor credit score, you could still get a rate that’s lower than a credit card.

To improve your chances of qualifying for a larger personal loan amount or better rate with a lower credit score upon a credit check, consider applying for the loan with a cosigner that has better credit and more income, if allowed. Just try to repay the loan on time so the cosigner's credit won’t be negatively impacted.

Alternatively, you can work on improving factors like your debt-to-income ratio and a bad credit score before applying for a personal loan. Doing so might increase your chances of qualifying for a better rate.

DEBUNKING 3 MYTHS ABOUT PERSONAL LOANS

Myth 4: Applying for a personal loan is difficult

Advances in technology have made it easier than ever to apply for a personal loan. During the pre-internet era, you had to call a lender or visit them in person to apply for a loan. Today, you can apply for a personal loan from anywhere.

The process is quicker — it can take less than 10 minutes to apply for a loan with some lenders. You just have to enter some personal information like your name, date of birth and income.

In addition, it’s also easier to compare multiple lenders. If you prequalify for a personal loan via an online lender, you can compare the rates and terms of multiple personal loan lenders digitally or through a mobile app within seconds before applying.

Final thoughts

Now that you have learned about some common personal loan myths, you should be able to make a more informed borrowing decision. Before you decide to take out a personal loan, be sure to explore all of your options to make the best personal finance choice.

And if you end up taking out one, learn how to manage them. For example, make sure you can pay the loan back on time to avoid late fees and serious damage to your credit score. It's important to understand how personal loans different from business loans and a car loan, in that those two are secured loans rather than unsecured loans.

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