If you’ve done any research on financial management, you’ve probably run into the term “personal loan”—and for a good reason. Personal loans have become more popular in recent years and show no signs of slowing down. According to TransUnion, more than 20 million Americans had personal loans in 2020, up from 15 million in 2017.
However, this rise in popularity has led to an increase in conflicting information about personal loans and lenders. One website will tell you a personal loan will boost your credit, while another tells you to steer clear—it’s enough to make anyone’s head spin!
Luckily, as a company with years of experience in personal loans, we’ve got the information necessary to set the record straight. To help you make the best decision for your financial situation, we’ve compiled this list of 7 truths you may not know about personal loans. Read on to discover common misconceptions surrounding personal loans and the facts behind them!
Truth #1: There Is More Than One Type of Personal Loan
In fact, there are two types of personal loans: unsecured loans and secured loans.
Secured personal loans are supported by one of your assets, such as your car, your home, or a savings account. If you are unable to make payments on your loan, your creditor has the right to take this asset as a form of payment. Because lenders have a guaranteed way of collecting your debt, these types of personal loans often have lower interest rates.
Unsecured personal loans, on the other hand, are loans that are not backed by an asset. Instead, your lender looks at your financial history and decides whether or not you qualify for a loan. These are the kinds of loans people are most familiar with.
While most personal loans are unsecured, some lenders also offer secured loans. If you have trouble qualifying for an unsecured loan or are interested in a lower interest rate, you may want to pursue a secured loan. However, be cautious when pursuing secured loans, as defaulting means you run the risk of losing something of great value to you, such as your home.
Truth #2: You Don’t Need Excellent Credit to Get a Personal Loan
Applying for a personal loan with a lower credit score can sometimes feel like asking out someone who you think is out of your league: as much as you’d love to give it a try, the fear of rejection can cause you to forgo a great opportunity.
In reality, your ideal personal loan may be closer than you think! Though it’s true that the top-tier personal loans are typically reserved for those with the best credit, most people can still qualify for a loan. There are even lenders who specialize in personal loans for people with lower credit scores or other financial difficulties.
It’s important to note that interest rates for loans vary widely. Therefore, it’s essential to shop around for quotes—even from creditors whose loans you don’t think you’ll qualify for. Don’t let your credit score intimidate you into accepting the first offer you get. Keep an optimistic, open mindset, and go with the lender that best meets your financial goals and needs.
Truth #3: Your Credit Score Won’t Automatically Take a Hit When You Apply
Pop quiz: what do these three things have in common?
- People use only 10% of their brains
- The color red makes bulls angry
- Your credit score will go down when you apply for a personal loan.
If you said that these are all common misconceptions, you’d be correct! Let’s not go into the finer points of human and/or bull brains right now, but as for your credit score—the reality is that, while adding a new account or a new credit check to your file will temporarily drop your score, it shouldn’t lower it by more than five to ten points. And if you’re using the personal loan to consolidate debt or establish credit, your score could quickly bounce back or even increase!
Truth #4: Personal Loans Are Incredibly Versatile
Think of personal loans as a financial Swiss Army knife—they can be used in various situations to solve problems, help you meet your goals, or even alleviate financial strain.
For example, let’s say you suddenly find yourself in a financial emergency: your car needs a new transmission, you have an unexpected stay at the hospital, or you suddenly lose your job without another one lined up. If you don’t have the bandwidth in your budget to cover an emergency expense, a personal loan is a great alternative to your high-interest credit card.
Personal loans can also be used to consolidate debt. When you use a personal loan to pay off all of your other existing debts, you consolidate the multiple payments down into one affordable, low-interest payment a month. Not only does this help you balance your budget, but it also allows you to get out of debt faster than you would otherwise!
Truth #5: Your Loan Interest Rate Likely Won’t Change
Interest rates for personal loans will vary depending on the lender. Still, more often than not, these interest rates will be fixed.
So, why is this something to celebrate? In simple terms, a fixed interest rate guarantees that the interest rate will stay the same until you make your final loan payment. This means you can kiss the headache that comes with budgeting goodbye, as you’ll know exactly what you’re paying monthly for interest ahead of time and won’t have to deal with unanticipated rate hikes.
Truth #6: Not All Personal Loans (Or Lenders) Are Created Equal
Let’s face it: while there are hundreds of lenders and loans to choose from, applying for a loan from multiple lenders in a short span of time can cause the loans to start to blur together. Pretty soon, it can be hard to distinguish the good creditors from the not-so-stellar creditors.
That’s why it’s critical to do some research upfront and look into who your lender really is. In particular, keep an eye out for hidden fees: some less reputable businesses will charge fees if you pay off your loan earlier than planned or if you make larger monthly payments than necessary. You’ll also want to double-check the lender’s Better Business Bureau (BBB) rating and reach out to your state’s Attorney General’s office. A quality lender will have an A+ BBB score and will have little to no complaints filed with the Attorney General.
Truth #7: Getting a Personal Loan is Faster and Easier Than Ever
In years past, applying for a personal loan was a long, drawn-out process: you’d have to go to a physical bank branch, fill out an application by hand, wait for approval, and then wait even longer for the money to reach your account.
The rise of Internet banking has not only increased the number of lender options available to consumers, but it’s also faster and easier than ever to apply for and receive a personal loan. Online lenders have streamlined both the application and approval processes, with both a decision and your loan arriving in the following days or, in some cases, within hours of hitting the “Submit Application” button.
The Truth, the Whole Truth, and Nothing But the Truth
For many, personal loans offer an excellent solution to a variety of financial struggles, a means of achieving important goals, or a way to pay for meaningful experiences. If you feel that a personal loan is the right fit for your needs but still have questions, please reach out to one of our experienced loan agents!
Not only will they help you separate fact from fiction, but they will also work with you to find the offer that best meets your needs. Call 866-414-4198 or send us a message here to connect with a Credit Direct loan agent today!