Personal loans are like the Swiss Army knife of borrowing, in that there’s more than one way to put a loan to work. You might use a personal loan to consolidate debt, do home upgrades or repairs, pay medical bills, start a business, cover the cost of a dream wedding or vacation, pay an outstanding tax bill, or buy a car.
That kind of flexibility is great and could make a real difference in your life but for whatever reason, personal loans are sometimes overlooked — and that’s often because borrowers don’t always understand the ins and outs of how they work. Let’s dig in to some of the myths surrounding personal loans to help you decide whether getting one is the right fit for your financial needs.
Common Misconceptions About Personal Loans
Personal loans can be confusing at first but the more you know, the easier it is to separate fact from fiction. Here are some common myths:
1. Applying for a personal loan is a lot of work
How hard is it to get a personal loan? Not as difficult as you might think.
Once upon a time, applying for a personal loan meant going to your bank and filling out a stack of paperwork, then waiting for days or even weeks to hear back about whether you’re approved. Thanks to technology, the application process is much more streamlined. Now, many banks allow you to apply for a personal loan online.
Review the personal loan requirements before you start your application, making sure you have any supporting documents uploaded to your computer and ready to go. This most often includes recent pay stubs and a copy of your ID. And if you’re not already a customer of the bank you’re applying for a loan with, check to be sure that you can start the loan application process online. In some cases, you may have to meet with a banker in-person to get the ball rolling.
2. Personal loans aren’t worth considering in an emergency
When life throws you a curve ball and you need money quickly, a credit card may seem like the best option if you don’t have an emergency fund. You shouldn’t discount a personal loan, however.
People often wonder, “How long does it take to get a personal loan?” The answer depends on which financial institution you’re getting a loan from. Banks have their own policies regarding loan approval and funding. It may take a few days, or a few weeks, depending on the lender.
Online and alternative lenders can also offer fast funding and are worth exploring depending on your needs. Just make sure to pay attention to the fine print and loan conditions to ensure you’re getting the best deal possible.
3. A personal loan is the most expensive way to borrow
One thing that’s misunderstood about personal loans is the cost.
Personal loans charge interest, just as a credit card does, but there can be a big difference between the annual percentage rates. If you have a higher credit score, you may find that a personal loan from a bank carries a lower interest rate than a credit card offers. And getting a personal loan from your bank can also pay off if you’re eligible for a discounted interest rate for being a loyal customer.
There’s also a difference in how the rates for personal loans versus credit cards are calculated. With a credit card, the rate is usually variable, meaning it’s tied to an index rate. If that index rate increases, your credit card APR rises as well. With personal loans, the rate may be fixed, meaning it stays the same over the life of the loan. This allows for more predictability in adding up the true cost of borrowing over time.
One thing to keep in mind is the potential for an origination fee. This is a fee some lenders charge upfront for a personal loan, and it’s typically deducted from the loan proceeds. If you’re applying for a personal loan with your bank, check to see if there’s an origination fee and if there’s any waiver or discount available for being a loyal customer.
4. Applying for more than one personal loan increases your odds of getting approved
Shopping around for a personal loan is a smart move, but there’s a right way and a wrong way to do it. Every time you apply for a personal loan, it registers on your credit report. Each inquiry for a loan can trim a few points off your credit score. Applying for multiple loans at once could actually work against your approval odds, instead of in your favor. Remember to review the personal loan requirements for each lender first before moving ahead with your application.
Personal loans aren’t one-size-fits-all
There’s a lot to consider when looking into a personal loan. The interest rate and fees are important, but you should also think about how much you can borrow. Taking time to compare your options can help you narrow down the field and choose a loan that’s right for you.