Key learning points
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A personal loan can be a cheaper option compared to other forms of financing for large purchases or bills.
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Provided you use them responsibly, a personal loan can also help build your credit score.
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The personal loan space continues to grow rapidly, meaning fast processing and funding times.
Personal loans often have a more favorable interest rate than credit cards. They may also have better terms, although the way you spend money is less flexible.
Despite the benefits, myths about personal loans can lead some borrowers to overlook them. But separating the myths from reality is key to determining whether personal loans are right for you.
Myth: Personal loans require collateral
Personal loans do not always require you to provide an asset as collateral to be approved. In fact, many personal loans are unsecured. This means that lenders base their approval on your credit score and not an asset.
Secured loans, such as car loans or mortgages, are backed by collateral. When you borrow a secured loan, the collateral can be repossessed if you fall behind on payments.
However, unsecured personal loans do not require collateral. It may mean a slightly higher interest rate, but there is less risk than with a secured loan.
Myth: It’s hard to get approved for a personal loan
Approval for personal loans is generally based on just a few key criteria: your employment and income history, your credit score, and your debt-to-income ratio (DTI).
There is a common misconception that personal loans involve a difficult application process. In the past, a personal loan might have involved filling out a stack of paperwork and meeting a long list of requirements. Although qualification requirements vary depending on the lender, approval is much easier than applying for a mortgage and requires less documentation.
Most lenders usually allow you to apply online within minutes. Normally you will have to complete a short questionnaire. After that, you may need to upload proof of income and employment, as well as your address and documentation confirming your identity.
Myth: Personal loans are not available to people with bad credit
It’s easy to believe that personal loans are only available to those with the best credit, especially since marketing and advertising often target these borrowers. While it’s true that borrowers with solid credit scores are typically offered lower interest rates, it’s still possible to get a personal loan with bad credit.
In some cases, these loans are secured to protect the lender against risk. There are also unsecured personal loans with bad credit. They generally have higher interest rates and more fees.
Myth: Only banks offer personal loans
The lending landscape has changed significantly over the past twenty years. There are several lenders that offer personal loans, not just banks.
Online lenders offer many benefits, including competitive interest rates and fast processing times. Some provide a credit decision within minutes and financing within two days of approval.
Myth: Personal loans always hurt your credit
When used responsibly, personal loans can help improve your credit score in the long term. As with any form of credit, it is important that you repay the loan responsibly. Consistent, on-time payments help keep your score healthy.
And just like with a car loan or credit card, applying for a personal loan results in a hard credit check. This credit check will have a temporary, negative impact on your credit score. By keeping your loan in good standing and consistently making payments on time, the impact of the credit inquiry will quickly be offset by the positive impact of the loan itself.
Myth: Personal loans are worse than credit cards
For people with a good to excellent credit score and a stable income, the interest rates on personal loans are often lower than those on credit cards. You may even be able to find personal loan rates under 10 percent.
The national average rate for credit cards is well over 20 percent. This means that you will have to pay less interest overall if you use a personal loan instead of a credit card.
Myth: Personal loans take a long time to process
Personal loans are one of the fastest ways to borrow money. Many lenders, especially online lenders, are known for the speed of the entire process: from assessing the application to depositing the money into your account.
It is not uncommon for some lenders to approve your application within one to three days and provide funds within one to three days of approval. Some may even make funds available the same day your application is approved.
Myth: You can only get a personal loan if you are employed
Although lenders like to see a steady source of income, it is still possible to qualify for a personal loan if you are self-employed or have other sources of income. You may need to provide a few years of tax returns or recent 1099 forms in lieu of pay stubs from an employer.
Myth: You can’t get a personal loan if you still have a loan
Every lender takes your DTI into account when applying for a loan. A previous loan could result in a higher DTI – which could lead to rejection. As long as you can handle the monthly payments, there are lenders that will allow you to take out multiple personal loans
The same assessment criteria apply to your application for a second loan as for the first. Lenders consider your income, current debts and credit score to determine whether you can successfully repay the loan.
In short
Personal loans have many advantages when used responsibly. Not only are they available for almost any type of expense, but they typically require no collateral and have lower average rates than credit cards.
Before taking out a personal loan, weigh the pros and cons. If you decide they’re right for you, compare multiple lenders to find an option that best suits your needs.
