Truthfully, a personal loan can be a very useful tool for any loan purpose, including financing a big expense like a home renovation or consolidating debt.
However, there is a lot of misinformation out there about these financial products. With that in mind, we're going to set the record straight on the three common personal loan myths below. Keep reading to learn what you need to know before applying for one of these loans.
3 personal loan myths you should ignore
- Personal loans are an expensive way to borrow money
- You must have a good credit score to get a personal loan
- Applying for multiple loans increases your chance of approval
Myth 1: Personal loans are an expensive way to borrow money
While it's true that financial institutions do charge interest in exchange for borrowing loan funds, personal loans can have some of the lowest rates available. According to the most recent data from the Federal Reserve, the average annual percentage rate (APR) on a personal loan is just 9%, compared to the average rate on a credit card, which is 14%.
Still, the interest rate that you're given can vary by lender so it's a good idea to shop around and get quotes from multiple lenders before you apply for a loan. In most cases, it also depends heavily on the strength of your credit profile. For the most part, those with good or excellent credit scores can expect to get the best loan rate.
If you think a personal loan might be the right fit for you, use an online marketplace like Credible to view your personal loan options.
Myth 2: You must have a good credit score to get a personal loan
However, that’s not to say that there aren't personal loan options out there for those with a less-than-perfect credit score. Fortunately, bad credit loans do exist. You may just have to jump through some extra hoops in order to increase your chances of loan approval. In particular, a loan company will often ask you to have a cosigner or to offer a form collateral in exchange for better repayment terms.
On the other hand, if your goal is to keep your monthly payments as low as possible, you may want to focus on paying down your credit card debt before applying for a personal loan. Since credit scoring plays such a big role in the approval process, it makes sense to get your score into the best shape possible before filling out an application.
Alternatively, you may also be able to secure a better rate if you opt for a shorter repayment term or for smaller loan amounts.
To get a better idea of what you can expect to pay, use Credible's personal loans calculator or visit the website to get a sense of the personal loan rates offered to you.
Myth 3: Applying for multiple loans increases your chance of approval
Lastly, many people mistakenly believe that applying for loans with multiple lenders at the same time will increase their chances of getting approval. Unfortunately, applying for multiple credit loans at one time has a high chance of affecting your credit negatively.
In practice, lenders will pull your credit every time you apply for a loan and having too many inquiries on your credit report at one time can hurt your credit score. Instead, it's a much better idea to shop around until you find the lender that's the best fit for you and then apply for one loan at a time.
The bottom line
Hopefully, debunking these myths has given you a better idea of what to expect when it comes time for you to apply for a personal loan of your own.
However, if you have more questions on this topic, the best thing to do would be to consult a financial adviser. They can look at the specifics of your financial situation and give you individualized advice on the type of personal loan that might be most appropriate for you.
If you're ready to get started, visit Credible to view your personal loan options and to compare rates and lenders. Alternatively, you can also visit Credible to be put in touch with an experienced loan officer who can answer any questions that you may have on the approval process.