When needing quick cash and for individuals with good credit, a personal loan is a viable option. Unlike other loans, lenders of personal loans allow people to borrow money based on credit standing alone. In other words, they don’t need any type of collateral to secure the money.
For the most part, the processing of personal loans is straightforward. Even so, many people have the wrong idea or information about borrowing money this way. To clear up any confusion, especially if you’re interested in securing a personal loan, consider the truths versus myths provided below.
Excellent Credit Required
The primary reason that many people don’t even consider a personal loan is they believe this is only for individuals who have excellent credit.
While you do need good credit to secure a personal loan, that doesn’t mean it has to be perfect. It’s important to note that the amount of money you can borrow and the interest rate attached will depend on your FICO score. However, many lenders work with individuals who have some financial challenges.
Typically, banks and credit unions approve personal loans for people with a debt-to-income ratio of around 50 percent or less. So, if you meet that criterion and don’t have perfect credit, there’s a chance you’d get approved.
It’s also important to beware of companies offering personal loans that don’t require any credit history at all, especially those advertised online. In most instances, those aren’t bona fide personal loans, but some type of payday loan. The two are completely different. Particularly, payday loans have outrageous interest rates.
Speaking of interest rates, another myth about personal loans is that regardless of the lending institution, you’ll pay extremely high interest.
That’s not true at all. As long as you work with a reputable bank or credit union and have decent credit, you can get a personal loan with interest under 11 percent. The reason this type of financing has higher interest compared to a car or home loan is that there’s no collateral.
Simply put, the only thing a lender requires is your signature on the official documentation. So, they take a risk, which calls for a higher interest rate. Even so, you won’t pay an outrageous amount in interest. Just remember, if you have excellent credit, the interest rate will drop substantially.
If you miss several payments on a personal loan, it doesn’t matter.
Lenders report personal loans to at least one, if not all three reporting agencies. So, if you miss even a single payment, you’ll see a hit on your credit. Although a bank or credit union doesn’t have collateral to collect, they still have several ways to get the money owed.
For instance, a lending institution can always file a judgment against you. As a public record, other lenders will see this information for years to come, making it difficult or even impossible for you to buy a house, car, or take out a secured loan. Also, a lender can sometimes have your wages garnished.
Application Is Hard for Personal Loans
Applying for a personal loan will damage your credit score.
The reason behind applying for a personal loan determines any impact on your credit. If you want to borrow money for a vacation, but you’ve maxed out multiple credit cards, then yes, your FICO score will likely decrease.
However, if you plan to use the loan to consolidate bills, your FICO score may drop initially but it will increase over time. Whenever someone inquires about credit, it’s common for their credit score to drop but only temporarily.
By consolidating your debt using the personal loan, your credit will improve in a short time. That’s because you paid down or off other bills that were probably hurting your credit rating. With those out of the way, the reporting agencies will recalculate your score to show improvement.
Hard to Obtain
Another reason that some people don’t apply for a personal loan is they feel the process is too long and complicated.
In most instances, securing a personal loan is fast and easy. Again, if you have decent credit and meet the lending institution’s criteria, you could have the money in a matter of days . Since this type of loan doesn’t require any collateral, there are only a few documents to read and sign.
Bad for an Emergency
When an emergency arises, people need money fast. So, there’s no reason to consider a personal loan.
As stated, getting a personal loan usually doesn’t take long at all. Remember that the time frame depends on several factors, including the lender, the amount of the loan, and your credit. So, there are instances when getting this kind of financing can take a few days or longer. However, most people with good credit can have the money the same day.
No, applying for several personal loans to increase the odds of getting approved isn’t a good idea.
Again, every time you apply for financing, your credit score will take a hit, although temporarily. Not only will multiple applications damage your credit rating but they won’t help at all in getting you approved. When a lender pulls your credit report and sees that you have more than one inquiry for a personal loan, that puts them on edge. As a result, you could get denied whereas, if you had only applied with them, you might get approved.
The Bottom Line in Securing Personal Loans
For many people, a personal loan is incredibly beneficial. However, it’s important to know the truth rather than believe in myths. If you have any questions about this type of financing, talk to a representative at your bank or credit union. If you don’t have an account anywhere, turn to a reputable lending institution for assistance. Also, just as with other loans, there’s nothing wrong with comparing what different lenders can offer.