There are a lot of myths surrounding personal loans. Things like ‘loans are an expensive way to borrow money’ can be quickly dispelled by putting numbers into a loan repayment calculator and seeing the monthly payment for different loan amounts, repayment terms, and annual percentage rates (APRs). But what about some of the other misconceptions people have about personal loans? Let’s sort some financial facts from fiction.
Myth 1 – If you have a low credit score you won’t be able to get a personal loan
While some lenders may have minimum credit score requirements, others look at your whole financial picture. Factors such as having enough income to support the loan’s monthly payment or ability to pledge collateral may offset a limited or challenged credit history.
Myth 2 – Personal loans are only offered by banks
Many people assume that you can only get a personal loan from a bank, but that’s not the case! Plenty of other reputable financial institutions can offer both secure and unsecured personal loans. And many finance companies specialize in helping people who don’t qualify for bank loans.
Myth 3 – Personal loans have a lengthy application and approval process
First, getting pre-qualified can be done in a matter of minutes. Many financial institutions will offer a process where you can check for offers within minutes. If you see an offer you like and choose to submit an application, be prepared to provide identification, proof of income, and information about your collateral (for secured loans). If you plan ahead and have this information on hand, verification is easy.
Myth 4 – Taking out a personal loan can harm your credit score
First, checking for prequalified offers does not affect your credit score. Only if you move forward with a credit application will a hard inquiry appear on your credit report. That usually has only a small temporary impact unless you’ve been applying for credit excessively.
Second, personal loans can be a way to build credit. Personal loans are designed to be a manageable way to borrow and repay a large sum of money. When you take out a loan, you agree to a repayment schedule for a set amount each month over the period of the term. Making consistent on-time repayments can help to boost your credit score over time as it shows an extended financial relationship with a lender as well as your ability to make regular repayments. A personal loan used for to consolidate credit card debts may also help your credit score by lowering your credit utilization ratio.
Myth 5 – Personal loans require collateral
Personal loans come in two forms, secured and unsecured. Only a secured loan uses an asset as collateral. If you fail to meet the repayments on a secured personal loan, the loan provider can repossess the item used as collateral to cover the remainder of the money owed. Secured loans can be easier for someone with a lower credit score to attain. Unsecured loans don’t rely on collateral being offered; this can sometimes mean they have a higher interest rate than a secured loan but can still be an affordable way to borrow a large sum of money.
Often myths like these are spread by people who don’t fully understand personal finance and have had issues with costly debt such as payday loans and assume all loans are alike. On the contrary, a personal loan provided by a trusted financial institution can be an affordable and financially savvy way to spread the cost of borrowing a large sum of money.