Personal loans are something nearly every adult has thought about at some point in their lives. Initially, these loans were viewed as a last resort. That perception has dramatically changed over the years. They are now sold as a feasible option for financing the purchase of everything from furniture to used cars. The loans will usually range between $1,000 and $100,000 and are payable in 2 to 5 years.
A number of lenders will allow completion of the entire process online with loan disbursement done as early as the same day the application was received. Whereas personal loans are less complicated than mortgages, there are still a number of misconceptions around them. We’ll debunk some of them below.
Myth 1: You’ll Require a High Credit Score
The primary advantage of a high credit score is accessing loans at a relatively low interest rate. Having an average or low credit score does not automatically bar you from qualifying for a personal loan. Most people applying for a personal loan will have a score that’s sufficient; the only difference is that applicants with a higher credit score will get a better rate.
The risk of default is viewed as higher for persons with lower credit scores. The lender therefore prices this risk in the loan’s interest rate. You can better the rate you qualify for by working to improve your credit score months before your loan application. Pay off any debt you can, ensure your payments are up to date, and identify and resolve any errors on your credit report.
Myth 2: All Lenders are the Same
The rates and fees for personal loans vary significantly between lenders. A common mistake borrowers make when comparing loan offers is concentrating on the interest rate only. This is potentially misleading since some lenders will make up for their lower interest rate by levying additional fees.
Pay particular attention to any origination, check processing and late payment fees. Find out what is the total amount repayable. Visit loan comparison websites such as personalloan.co to see what terms and rates different lenders have available. That way, you can choose the one that’s best for you.
Myth 3: Your House is Collateral
Secured loans are protected by an asset of some sort. This asset could be a home, car or equipment. If the borrower is unable to keep up with the payments, the lender would recover their losses by selling the asset. Collateral makes secured loans less risky and leads to lower interest rates compared to an unsecured debt.
Personal loans are unsecured meaning no collateral is required. Whereas the interest rate will be higher, you can rest in the knowledge that your valuable items such as a house or a car will not be at stake. In case you fall behind on the payments, the lender will report this default to the credit bureau but you’ll get to keep your home.
Myth 4: Personal Loans Are Pricey
A personal loan will attract a higher interest rate than a secured loan. However, it still costs less than several other financing options. For example, you’ll get a better deal on a personal loan than you would on a payday loan or a cash advance. Personal loans are also less expensive than most credit cards.
Some of the differences may not seem like much but pile up quickly over time. If you had credit card debt of $10,000 at a 20% interest rate and a personal loan of $10,000 at 16% interest both repayable over 60 months, you’ll eventually pay $1,000 less on the personal loan. Another cost advantage of personal loans is that they make cash available to the borrower. In the event that the loan was meant to buy a used car or do some renovations on the home, you can negotiate a better deal when you have the cash at hand.
Thinking about a long put off home renovation, a dream vacation, or other expense that needs cash quickly, personal loans might be just the way to go. There’s little reason to be apprehensive when you have the right information at your fingertips.