A personal loan can be a great tool to help you get over a hurdle in your financial life. Personal loans can be taken out for a wide variety of reasons, from making a strategic purchase, paying for classes, or consolidating debt. Many consumers misunderstand personal loans and these 5 myths have become far-reaching. Learn the truth about personal loans to make an educated decision about getting one.
Myth: Personal Loans Have a Very Long Application Process
Applying for a personal loan is not as arduous and time-consuming as many borrowers think. The process is actually fairly straightforward at most lending institutions. One way to make the process run smoother is to have all the documents and information needed for the process with you when you apply, whether in person or online. Not having the right information available is the biggest reason that personal loan applications take longer than an hour or two.
If you’re not sure what the process will look like, call your bank and ask to speak with someone in the lending department. They can answer your questions and possibly even pre-qualify you over the phone.
Myth: Personal Loans Require Collateral
When many consumers picture applying for a personal loan, the image that comes to mind is an old country farmer taking the deed to his family’s land up to the slick money lender. That’s far from the truth about applying for a personal loan.
Actually, most application processes are handled by looking at the borrower’s income, monthly payments, and credit history. If you can afford to pay back the loan, there’s no need to bring collateral into the agreement. Increasingly, companies like SoFi and Earnest are using other non-credit score factors too.
Myth: You Must Have a Good Credit Score to Take out a Personal Loan
It’s commonly believed that people with bad credit won’t be able to qualify for a personal loan. While a higher credit score can help you get one of the best personal loans, a lower credit score doesn’t mean you won’t qualify at all.
When an applicant is turned down for a personal loan, it is almost always due to either the amount of outstanding debt he or she already has, or not having enough income to cover the monthly payments of the loan. A personal loan has a fairly short repayment period, which means you’ll have to pay a larger percentage of the principal every month.
Myth: Loans are Less Expensive Than Credit Card Debt
This can be true in certain situations. Personal loan payments are calculated with a certain amount of time for repayment. If you make your payments on time, you’ll pay your loan off on a set date. You can even calculate how much interest you’ll be paying ahead of time. With credit cards, the minimum payment is set to maximize the amount of interest you pay over the life of the loan.
However, when you have a credit card with 0% APR, and you’re able to pay off the amount of money owed before that APR period ends, then a credit card is less expensive. Just remember that credit cards are in the business of taking as much interest from you as possible. Introductory APR periods are lures to make you complacent about the amount of money you owe on the card.
Myth: Personal Loans Can’t be Used to Reduce Debt
Used strategically and with precision, a personal loan can help you reduce your debt by consolidating small accounts into one credit-building payment. For example, if you have five retail credit cards with $250 charged to each with high interest rates, you might choose to take out a personal loan of about $1300 at a lower interest rate from your bank. Then, you use that loan to pay off the retail cards, leaving you with only the less-expensive personal loan payment.
It’s tricky to start thinking about getting further in debt to pay off a different debt, and you should never attempt this strategy unless you’re very confident that you know what you’re doing. Taking out more debt than you can handle is like trying to cross a waist-deep river with a fast current. If you focus and make every move count, you’ll reach the other bank. But it will only take one little slip to be quickly pulled off your feet and down river.
Did you fall for any of these myths? Misinformation about personal loans is rampant, but knowing the truth could give you the tools you need to make a tangible change in your financial prospects.
Author: Jeff Gitlen
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