While credit cards have been considered mainstream for as long as I can remember, personal loans don’t always receive the same respect. Many people think it’s totally normal to run up balances on credit cards, yet they balk at the prospect of taking out a personal loan. That’s crazy when you think about it, especially since the average credit card interest rate is now over 17%.
While borrowing money is never ideal, you can save a ton of money on interest if you do some research upfront and take time to compare your options. It’s true that credit cards are a smart solution in a lot of cases, but it’s also possible that a personal loan could leave you better off in the end.
Before you write off personal loans as a borrowing solution, it’s helpful to know what’s true about them — and what’s hearsay. Here are some rumors you may have heard about personal loans in the past — and why they’re wrong.
Myth #1: Interest rates on personal loans are high.
Maybe you’ve heard (or assumed) that interest rates on personal loans are high, but that’s often not the case — especially if you have good credit. Lenders like LightStream and SoFi frequently offer personal loan rates as low as 4% for individuals with excellent credit. That’s considerably more affordable than the average rate on a credit card!
If you need to borrow money and pay it back over time, your interest rate may matter a lot more than you think. The difference between paying 17% APR and 4% or 5% APR can be thousands of dollars in interest, depending on how much you borrow and how long it takes you to pay it all off. That’s money you can save if you choose a low-cost borrowing option instead.
Myth #2: You need to visit a brick-and-mortar bank.
While consumers took out personal loans from their neighborhood bank or credit union decades ago — and you certainly still can — most people shop for loans online these days. Doing so is advantageous for several different reasons, including the fact that shopping online gives you the best chance to compare rates and terms.
Shopping online is also considerably more convenient than visiting a bank across town and waiting your turn to speak to a banker. When you deal with online lenders, you can compare offers and apply for a personal loan from the comfort of your home.
Myth #3: A personal loan will hurt your credit score.
Another prevalent myth is that borrowing money is going to hurt your credit score. People always assume this, whether you’re using a credit card, a personal loan, a HELOC, or some other type of loan.
While borrowing too much money can absolutely hurt your credit score, since it will increase your credit utilization, but borrowing money can also help your credit score. Because a personal loan is repaid in fixed monthly installments, the balance doesn’t count against your overall utilization rate — so consolidating credit card balances with a personal loan can actually help your credit score.
Another way a personal loan can improve your credit score is by changing your credit mix, which makes up 10% of your FICO score; credit scoring models prefer installment debt to revolving credit card balances. And a personal loan could also give you the opportunity to build a track record of steady, on-time monthly payments, which makes up 35% of your FICO score.
The bottom line: A personal loan won’t necessarily hurt your credit score at all, and it could even boost your score in the right scenario.
Myth #4: Personal loans are hard to apply for.
A lot of people become entirely overwhelmed by the mere idea of taking out a loan. This is usually because they assume they’ll have to visit a bank, but it’s also because it’s easy to become stressed over the details.
In reality though, applying for a personal loan is a piece of cake. You can compare loan options online, including fees and long-term costs, and you can even read lender reviews. Once you’re ready, you can fill out a simple loan application on your computer, and you could even receive the funds in your bank account in a matter of days.
Myth #5: You need excellent credit to qualify.
Here’s another prevalent myth about personal loans — you need great credit to qualify. This isn’t true at all. You do need good or great credit to qualify for a personal loan with the lowest interest rate and best terms, but there are also personal loans geared toward consumers with less than stellar credit.
While we would never suggest borrowing money if it’s going to put you in financial peril, a personal loan could help your financial situation over the long run. Even at 10% or 12% APR, taking out a personal loan to consolidate higher-interest credit card debt, for example, could reduce your interest costs and help you pay off debt faster.
Myth #6: Personal loans have a lot of fees.
Another rumor you may have heard is that personal loans have a lot of fees. While some personal loans absolutely have fees (origination fees, application fees, etc.), the best personal loans on the market tend to be free of fees altogether.
With Earnest, for example, you can borrow up to $75,000 with no origination fees, no early payment fees, and no hidden fees.
Keep in mind, however, that personal loans for people with bad credit do tend to have more fees along with higher interest rates. For the most part, your credit score, income, and debt-to-income ratio will determine whether you can qualify for a personal loan with no fees — or whether you’ll have to choose among less generous options.
The Bottom Line
Borrowing money is never fun, but you can lessen the financial pain if you conduct due diligence and find a borrowing option with low fees and interest costs. Sometimes a 0% APR balance transfer card will do the trick, but other times a personal loan with a low interest rate is the best option available.
Do some research online, compare costs, and weigh the pros and cons of each option before you decide. Sometimes a personal loan really is the best deal available — no matter what anyone says.
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