Debunking 5 Personal Loan Myths
When considering a personal loan, it’s important to get the facts right.
Tired of your outdated kitchen? Broke your leg and need to pay the hospital bill? Have some high-interest credit card debt to consolidate? Instead of dipping into your savings, consider using a personal loan for these types of expenses.
Personal loans offer borrowers a one-time deposit of cash that can be used however the borrower sees fit, within the loan terms. But how hard is it to get a personal loan? And does getting one hurt your credit history? We’ve busted some common personal loan myths below.
Your credit history and financial soundness are the biggest factors when it comes to being approved for a personal loan.
Personal loan applications can often be completed online in a few minutes and funds can be deposited as early as the next business day.
Depending on your financial situation, a personal loan can be a great financial tool to help you reach your goals.
Myth #1: Personal Loans are a Bad Financial Choice
Let’s start with the (in our opinion) biggest personal loan myth out there – that they’re bad for your finances. There seems to be stigma out there when it comes to getting a personal loan (and we don’t like it!). Debt is a tricky thing, and it’s important not to take on more than you can afford. But, when used thoughtfully, personal loans can be a great financial tool for a few reasons.
First, they can help you finance a big purchase or handle an unexpected expense without wiping out your savings. Second, they often have lower interest rates than a lot of credit cards. This means you can pay off this high-interest debt and only have one, consistent payment to make on the loan instead of several minimum payments across multiple cards if you choose to consolidate all of your credit card debt with a personal loan.
Third, they may help you establish a good credit history when you make payments on time. In the long run, having credit and successfully making on-time payments is the basis of building credit. Credit bureaus reward this positive behavior in their scoring models. This means responsible borrowing and on-time payments can improve your credit score and may even help you qualify for more credit in the future.
Myth #2: Getting Approved for a Personal Loan Is Hard
Contrary to this popular myth, getting approved for a personal loan isn’t (usually) as hard as getting approved for other types of loans, like a mortgage. In fact, a lot of online lenders can approve borrowers in as little as one business day.
When you think about getting a personal loan, you may worry that you need to have a bunch of documents on hand. While requirements vary from lender to lender, most only look at a few criteria when considering a personal loan application. These usually include your employment and income history, credit score and debt-to-income ratio.
Another way to take some of the guesswork out of your approval chances is to research personal loan options on third-party sites, like LendingTree or Intuit Credit Karma. These sites partner with lenders who have different offers and criteria for their loans. When you enter your information, they will show you loan offers where you have a good chance of being approved.
Myth #3: Researching Personal Loan Offers Hurts Your Credit
Even if you think a personal loan is the right choice for you, you may be afraid to consider multiple lenders because you don’t want to drive your credit score down. The good news is that researching lenders and comparing options rarely causes your credit score to change.
A lot of lenders and third-party sites will let you submit your information and give you different options to consider without doing a hard credit pull. Hard credit pulls are recorded on your credit report for two years, and they can affect your credit score, particularly if you have a lot of hard inquiries in a short period of time.
Several hard inquiries in less than three months can suggest that the borrower is a credit risk. Studies have shown that borrowers with six or more recent pulls are eight times more likely to file for bankruptcy.¹
But considering different options by checking out a lender’s offer on their site, or comparing options on third-party sites, typically doesn’t involve a hard credit pull until you actually submit an application. This means you can research and review as many options as you like without it affecting your credit score, as long as you don’t hit that “submit application” button.
Myth #4: Personal Loan Interest Rates Are Higher than Credit Cards
Many people assume that personal loan interest rates are as high, or even higher, than credit cards because both types of credit are unsecured. Unsecured means they aren’t tied to collateral, like a house or savings account that the lender can take possession of if you default on the loan.
But, depending on your credit history, a personal loan can have a lower interest rate than many credit cards. In fact, Federal Reserve data showed that the average credit card interest rate in Q2 2022 was 16.65%.² Bankrate, on the other hand, found that the average personal loan interest rate has remained steady around 10.2% since the beginning of 2022.³
A lower interest rate on a personal loan may allow you to consolidate higher-interest credit card debt or handle a big purchase without paying as much in interest over time. Of course, your interest rate on a personal loan may be higher or lower than the average, depending on your personal financial situation.
Myth #5: Personal Loan Approval (And Funding) Takes a Long Time
Did you take out a loan for college? Or buy a house? Maybe you have friends that did. And the term loan probably makes you shiver thinking about how long you sat in limbo wondering if you were approved and if you should be looking at other financing options.
The good news with (most) personal loans, especially those from online lenders, is that the approval process doesn’t usually take that long. With the increase in online lenders for personal loans, the approval timeline has decreased. Traditional banks can take between five and seven business days to approve a personal loan application, but some online lenders can approve your application the same day. However, some online lenders may take between three and five days to review your information.
Additionally, many online lenders work with third party sites to connect with prequalified borrowers. Prequalified borrowers are often approved quicker because the lender has already determined that the borrower is creditworthy.
Once the application is approved, fund disbursement varies by lender. Some online lenders provide funding the same day the application is approved, while many can deposit funds the next business day. Some online lenders can take three business days or more, like many traditional banks.
All this is to say that you usually get the proceeds from a personal loan a lot sooner than funds for a bigger purchase, like a house or a car.
Personal loans are useful financial tools to help you fund important purchases, deal with the unexpected, or pay off other debts. Hopefully our myth busting helped clear up some of the misgivings you may have about taking out a personal loan.
Despite some common myths, personal loans don’t have to be a scary unknown. If you do your research and use it responsibly, they can be a useful part of your financial toolbox.