by Dana George | Updated July 21, 2021 - First published on Feb. 20, 2021
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Some myths take on a life of their own. Here are four personal loan myths that are simply not true.
Are there repairs around your house that need to be taken care of? Been itching to remodel a room? Or, are you looking for a personal loan that allows you to consolidate high-interest debt? Whatever your reason for checking out personal loans, they can be a great resource for funds. The problem with personal loans is the number of myths that can scare borrowers away. Here are four of the tallest tales, followed by the truth.
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One of the most prevalent myths is that personal loans are always an expensive way to borrow money. Because you can apply for a personal loan through your local bank, credit union, or online lender, the competition for your business is fierce. That means most lenders want to be the one to tempt you into borrowing with their interest rate and loan terms.
Today, the best personal loan interest rate runs around 2.5% for the most highly-qualified borrowers. If you have a good credit score and plenty of income to cover the monthly payment, you can snag a personal loan for far less interest than you might pay for an auto loan -- and certainly less than you'll pay on a credit card.
The personal loan application process is surprisingly simple. Here are the steps:
One of the other personal loan myths that seems to hang on like barnacles to a ship hull is that only those with excellent credit need apply. The harsh truth is this: Anyone with a good credit score will be offered a better interest rate than someone with a low credit score. But that doesn't mean that poor credit bars you from eligibility. There are several great personal loan lenders for those with poor credit.
If you have a low credit score, you can count on paying a higher interest rate and fees than someone with excellent credit. But that doesn't mean a personal loan isn't right for you.
Let's say you have an auto loan and credit card debt with high interest rates. It doesn't hurt to apply for a loan. If you're approved for a lower rate than you're currently paying for those other debts, you could consolidate the existing debt into a lower-interest personal loan.
Even if you get a loan rejection, it's not the end of the road. If your application was for an unsecured loan, consider applying for a secured loan. A secured loan involves putting up something of value (like property or an investment account) as collateral. As long as the lender is confident in your ability to repay, they will likely reconsider your loan application.
Keep in mind that the lender can take possession of the collateral, sell it, and recoup its losses if you miss payments. Do not enter into a secured loan unless you are confident you can make every payment as agreed.
As long as you have the income to repay more than one personal loan, there's no reason you can't take out another. Let's say you decided to remodel your kitchen a few years ago. You considered a home equity loan or home equity line of credit (HELOC), but because you have good credit, you got an unsecured loan for about the same interest rate.
You've made every payment on time, but now you're in a pickle. You're on the way home from a family trip to the Grand Canyon when your SUV breaks down -- and you're shocked by how much it will cost to replace the transmission.
This is when you call your original lender and apply for another loan to make car repairs. As long as your repayment capacity is the same as it was when you took out your last loan and your credit score is still high, there's nothing keeping you from carrying more than one unsecured personal loan.
Personal loan myths -- like all tall tales -- take on a life of their own. Next time you consider a personal loan, you'll know what to believe.
The Ascent team vetted the market to bring you a shortlist of the best personal loan providers. Whether you're looking to pay off debt faster by slashing your interest rate or needing some extra money to tackle a big purchase, these best-in-class picks can help you reach your financial goals. Click here to get the full rundown on The Ascent's top picks.
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