6 Biggest Myths About Personal Loans
Most American adults have experience with car loans, home loans and/or student loans. But personal loans aren’t as common — which means they’re ripe territory for myths and misinformation.
What are some of the biggest myths about personal loans? Financial experts offered six common myths.
Personal Loans Are Not Readily Available
You might think it’s hard to get a personal loan based on what you’ve heard. But that’s not the case, according to Chad Cummings, an attorney and CPA at Cummings & Cummings Law who previously worked in finance and tax with American Airlines, PwC and JPMorgan Chase.
“In reality, personal loans are widely available from banks, credit unions and online lenders,” Cummings said. “Approval criteria vary, but many lenders now use streamlined digital applications and automated underwriting systems.”
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The Interest Rate Will Be Very High
Some personal loans carry high interest rates — especially for borrowers with poor credit. But that’s more the exception than the rule.
“Competitive lenders regularly offer APRs in the single digits to borrowers with solid financial profiles,” Cummings said. “Compared to revolving credit card debt — where average APRs exceed 20% — a fixed-rate personal loan can provide a cost-effective way to consolidate and reduce interest charges.”
You’ll Need Collateral To Get a Loan
Yes, providing collateral can help you get a lower interest rate, said Melanie Musson, an insurance and finance expert at Clearsurance.com. But it’s not necessarily a requirement.
“You can opt for an unsecured loan without risking losing your house or car,” Musson said.
You’ll Also Need Excellent Credit
This might be the biggest myth surrounding personal loans — that only people with excellent credit need apply. But borrowers with average credit scores (in the mid-600s) can often qualify as long as they have stable income and manageable existing debt, according to Cummings.
“For those with limited or poor credit, credit unions and fintech lenders may still approve applications at smaller amounts,” he said. “The process is no longer as restrictive as it once was.”
Musson has a similar take, saying that even with a low score, “you can usually find someone willing to lend you money for the right price.”
That doesn’t mean you should apply for a loan, though.
“Perhaps you should think twice about getting a personal loan if you’re having a hard time keeping up with your current debts and have low credit,” she said.
Your Credit Score Will Take a Hit
Another myth is that personal loans will lower your credit score. But that’s not necessarily the case, either.
“Applying for a loan triggers a hard inquiry, which may cause a temporary small drop in a credit score,” Cummings said. “However, once approved, the loan can improve a borrower’s credit mix by adding an installment account. Timely payments will build positive history and strengthen the score over time.”
The Lender Will Ask What the Money Is For
If you want to tell the lender why you need a personal loan, feel free. But you probably won’t be required to.
“You might think you need to tell a lender, ‘I need a loan for a piano,’ or, ‘I will use these funds to pay for my rent while I get established with my new job,'” Musson said. “The fact is, you can use money from a personal loan for whatever you want.”
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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