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Personal loans often come with more favorable interest rates than credit cards. These loans are generally unsecured, meaning you don’t have to pledge collateral — an asset a lender can take if you’re unable to repay the loan.
Despite these benefits, personal loan myths may cause some borrowers to overlook them as an option. But separating the myths from reality is essential to determine whether personal loans are a good fit for you.
Myth: Personal loans require collateral
Personal loans do not always require that you provide an asset as collateral to get approved.
Secured loans, such as car loans or mortgages, are backed by collateral or assets. In the case of a car loan, the asset is the car itself, which can be repossessed if you fall behind on payments. The asset backing a mortgage is the house, which a bank can sell if you fail to remain current on your mortgage.
However, there’s no collateral requirement for unsecured personal loans. Be mindful that you will often get a higher interest rate than you would for a secured loan since there’s no asset for the lender to fall back on if you fall behind on the monthly payments.
Myth: It is hard to get approved for a personal loan
The widely held misconception is that personal loans involve a daunting application process that includes completing a stack of paperwork and meeting a long list of requirements to get approved for funding. While qualification requirements vary based on the lender, approval is far easier than applying for a mortgage and involves less documentation.
You can usually apply online in just a few minutes with most lenders. You’ll typically need to fill out a brief questionnaire and upload proof of income and employment, address and documentation that confirms your identity.
Myth: Personal loans are not available for people with bad credit
Although getting a personal loan with bad credit can be challenging, it’s possible. Some lenders offer personal loans for borrowers with bad or fair credit.
In some cases, these loans are secured to protect the lender should you default on payments. There are also unsecured loans for those with less-than-ideal credit. Generally, the interest rates on loans for those with bad credit will be higher, or the fees may be steeper than what borrowers with good to excellent credit would be required to pay.
It’s easy to believe that personal loans are only available to those with the best credit, as marketing and advertisements often target these borrowers. While it’s true that borrowers with solid credit scores are typically offered the most competitive interest rates on any type of lending, including personal loans, it is still possible to borrow money with a less-than-perfect credit score.
Myth: Only banks offer personal loans
The lending landscape has changed significantly due to financial technology, and it’s now possible to get a personal loan through an online bank.
Online banks offer many benefits, and sometimes offer more competitive interest rates, as they do not have the expenses associated with running physical branch locations. Consequently, cost-savings may be passed on to borrowers.
It’s also not unusual for online lenders to have faster processing times. Some provide a lending decision in a matter of minutes and funding the same day or in as little as 24 hours from the time of approval.
Myth: Personal loans always hurt your credit
When used responsibly, personal loans can help improve your credit score over the long term.
The key, however, is to repay the loan responsibly. Consistently making on-time payments and not missing any payments will help keep your score healthy.
Applying for a personal loan prompts the lender to run a hard credit check to assess your overall financial health. This credit check will have a temporary, negative impact on your credit score. By maintaining your loan in good standing and consistently making on-time payments, the impact of the credit inquiry will quickly be outweighed by the positive impact of the loan itself.
Myth: Personal loans are worse than credit cards
For those with a good to excellent credit score and a stable income, the interest rate on personal loans is often cheaper than that of credit cards.
For those with the best credit scores, personal loan interest rates can be found for under 10 percent. The national average rate for credit cards is over 19 percent. So, despite the belief that personal loans are one of the most expensive ways to borrow money, you’ll likely pay less interest overall by using a personal loan instead of a credit card.
Myth: Personal loans take a long time to process
Personal loans are one of the quickest ways to obtain money. Many lenders, particularly online lenders, are known for the speed of the entire process — from the application review to the deposit of funding in your account.
It is not unusual for some lenders to approve your application within one to three days and to provide funds as quickly as one to three days after approval. Some may even make funds available on the same day your application is approved.
Myth: You can only get a personal loan if you have a salaried job
Though lenders do like to see a steady source of income, it is still possible to get approved for an emergency loan if you are self-employed or have other sources of income. Often in such cases, applicants are asked to provide a few years of tax returns or recent 1099 forms instead of pay stubs from an employer.
Myth: You can’t get a personal loan if you have another loan
It is entirely possible to be approved for a personal loan even when you already have an existing loan open that you are paying. The same review criteria are applied to your application for a second loan as the first. Lenders will consider such factors as your income, current debt to income level and credit score to determine whether you can successfully repay the loan.
Personal loans have many benefits when they’re used responsibly. In addition to being available for nearly any type of expense, personal loans typically don’t require collateral and average personal loan rates tend to be lower than average credit card rates — especially for those with excellent credit scores.