Personal loans have long been regarded as a necessary evil, and people strived to avoid them as much as possible, only considering them as a last resort. Much of the fear came from misconceptions about these financial products and myths which propagated through urban folklore. If you have a business idea, dream about getting a better job and need additional qualifications, or would like to make some renovations, a personal loan could offer you the necessary funding fast and reliable. Here is a list of the most common misconceptions about personal loans which usually come from unfortunate experiences with certain lenders, but are not a general rule.
Collateral is mandatory
Although some personal loans are secured and offer better rates, most are unsecured and could only impact your credit score in case of a payment default. Depending on the amount required and your financial situation, putting your house or car as collateral could be a strategic move to get a lower rate. Only choose this option if you are confident you can cover the monthly installment comfortable and are just looking to save some money. Otherwise, there are plenty of unsecured options.
Only available for employees
Before the rise of the gig economy facilitated by the technology’s surge, there was little demand for such products from people who were not employed. Right now, the middle class is redefining its boundaries and lenders are taking notice. There are even dedicated products for solopreneurs, or small business owners and general products accommodate these categories as well.
High credit score is required
This is less of a myth and more of an inaccuracy. While most lenders ask at least for a fair score (660-680), the higher, the better to secure an APR in the lower range. A good example to check is the best egg loan review, a product aimed at borrowers with excellent score for which they get good rates. Since it is in the lender’s best interest to sell their products, they have created solutions to suit an extensive range of possible applicants. Also, as a borrower, you must shop around for the best rate and even negotiate once you have chosen a lender.
Selecting the best is a complex process
Before the digital age, it would have been time-consuming and nerve wrecking to visit 20-30 lenders’ offices to get their offer and compare them. Right now, you can have a personalized offer from different institutions in a matter of minutes without leaving the comfort of your own home. The best news is that you can choose between banks, credit institutions, and peer-to-peer lenders, or even credit unions.
The approval process takes time
This myth also lingers on from the era of bureaucracy and paperwork of the 80’s or early 90’s. Lenders are motivated to make this process as fast and easy as possible since this means more business for them. Some are even testing new ideas, including using AI for automatic application processing. Although underwriters have not disappeared entirely, the waiting time is usually between 3 -5 days, and we can expect to see even shorter timespans very soon.
All lenders have the same fees
The personal loan market is not subject to strict regulations regarding the APR and fee percentages. Lenders have the opportunity to set their own rates, to fit for their business models. Therefore, you can expect some discrepancy from one provider to the other. Also, although the upper and lower limits are identical, there is no reason to assume you will get the same evaluation and the equal APRs from different lenders. Each of them has their own risk assessment models and even preferred categories of clients.
The interest rates are predatory
Considering that most personal loans have an average APR of 12-15% and a credit card’s APR is around 16% but can go as high as 48%, this is clearly a myth. The only factor which is in favor of using a credit card instead of a personal loan for amounts not exceeding $5000 is the convenience of swiping the plastic when compared to the hassle of applying for a personal loan.
A way to pay credit card debt
Some borrowers, however, have identified this discrepancy and created the alternative myth that this is an excellent way to cover your existing credit card debt with cheaper money. This could be an option if you have costly credit cards which you intend to pay in full and close. If you are just repaying your current debt just to take out more cash is a poor option. Evaluate the value and expected timeframe for repayment. A loan makes sense if you can’t cover the debt in less than one year.
The priciest option on the market
As highlighted, the personal loan could be one of the cheapest options on the market, below a credit card and way less expensive than a payday loan which could even be classified as predatory by comparison. Also, through a personal loan, you get a higher amount of cash which you can use to leverage your negotiation power. The only part-truth in this myth is the fact that unsecured loans are pricier than secured ones, the difference being the risk prime.
No tax advantages
Loans are not considered income. Therefore, these are tax-free money that you can use in full and should not be included in the tax fund. Pay attention, this only applies to loans from certified financial institutions. The best news is that you can claim tax benefits if you have the proof that the credit has been used to pay for an eligible expense.