If you’ve never gotten personal loans before, you may not understand how they work or what they’re for. Once you uncover the benefits, you may realize they can make sense for certain financial situations, like funding a large purchase or consolidating high-interest debt. In this article, we’ll explore some of the most pervasive myths about personal loans and debunk them to help you understand the truth.
Myth #1: Personal loans require collateral
Collateral is an asset that you contractually agree to use to guarantee a loan. For example, your house acts as collateral for a mortgage, and your car acts as collateral for an auto loan. When collateral is required, a loan is considered secured by that asset, and the lender can sell the asset to recoup what you owe if you default on the loan.
Personal loans can be unsecured loans. That means they don’t require collateral to back them, and you’re not at risk of losing collateral if you default on the loan. For this reason, lenders consider other factors, like your income and credit score, to determine eligibility when you apply.
Myth #2: You can’t get a personal loan if you have a low credit score
Many lenders consider your credit score as one of several factors when you apply for a personal loan. However, having a low credit score doesn’t completely preclude you from eligibility. Some lenders may issue personal loans to borrowers who have a lower credit score or are still building their credit. In turn, lenders may give those borrowers a higher interest rate or shorter loan terms. If you’re working to build your credit score, it makes sense to look for a lender that gives loans to borrowers in your credit score range.
Myth #3: Personal loans are unaffordable because of high interest rates
The interest rate on a personal loan tends to be more affordable than most payday and pawn loans, even when unsecured, and can be more affordable than carrying debt on a credit card. Because interest rates on personal loans can be lower, they’re a popular tool for debt consolidation. If you take out a personal loan to consolidate debt, you’ll shift the balance of those debts into a single, manageable payment due to one creditor instead of several, and you may save money on interest in the process if your new loan has a lower APR.
Myth #4: It can take a long time to receive money from a personal loan
Financial technology companies that specialize in personal loans have gotten fast at reviewing applications and disbursing loan funds. Traditional and some brick-and-mortar banks may still take weeks. In fact, some lenders can fund a personal loan within a few business days after approval. If you know you’ll need money quickly, check with lenders to see how soon you’ll receive loan proceeds before you apply.
Myth #5: Applying for a personal loan is complicated
Again, many financial technology companies and online lenders offer a straightforward application processes, so applying for a personal loan can be as simple as a 20 minute application or phone call. Plus, many lenders have experienced support teams available to walk you through the application process and answer any questions you have along the way.
The bottom line
Many myths floating around can make personal loans seem like a risky financial decision. But when used responsibly, they can be a valuable way to access the money you need to further your financial goals. When in doubt, contact a trusted lender or financial professional to get the truth about personal loans.
