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Updated on Tuesday, February 19, 2019
When it comes to personal loans, many Americans are more likely to turn to credit cards as a way to pay emergency bills, enjoy a dream vacation, or pay for items they can’t afford with cash.
According to Experian, existing personal loan debt was at $273 billion in the second quarter of 2018, while existing credit card debt was at $782 billion in the same period.
But it also shows personal loans with a greater year-to-year change in debt growth than credit cards. Whether personal loans are a viable option for expenses depends, apparently, on who you ask.
Awareness seems to be a key factor. When people are in the dark about financial solutions, they will draw their own conclusions, often leading to false perceptions.
What are some of the myths about personal loans?
5 things people say about personal loans
Myths about personal loans have developed over two centuries, making them hard to debunk.
Personal loans have a difficult and lengthy application process
Before the internet, borrowers had to apply for a personal loan by visiting their bank. During the days of the Morris Plan banks, they often evaluated borrowers based on character and income. This may have meant dressing in your Sunday best and arriving for a meeting with a loan officer with stacks of paperwork, pay stubs and tax returns.
You can apply easily online in just a few clicks. Many lenders will ask you to provide your Social Security number, your monthly expenses — including any outstanding debt such as mortgages, car loans, student loans and credit card debt — and your income.
Keep in mind that applying for a personal loan may require a hard credit inquiry and could lower your credit score. If you can, try to pre-qualify for a loan before you apply.
You won’t qualify for a personal loan if you don’t have excellent credit
This common misconception couldn’t be further from the truth. Personal loans are available for borrowers with a FICO Score as low as 500, but you won’t get the lowest rates with a rock-bottom credit score.
Most lenders look for borrowers with a credit score of 670 or higher. But a score of 800 or more will net your best terms and interest rates.
Personal loans have lower interest rates than credit cards
Unlike the other myths explored, this one has some truth to it. It all depends on your creditworthiness.
It might be smarter to open a credit card with a 0% introductory APR for balance transfers and pay down as much debt as you can during that introductory period. With on-time payments, your credit score will rise and you can continue using the same process until your high-interest debt is paid off.
Personal loans have high interest rates
“Personal loans have high interest rates” and “personal loans have lower interest rates than credit cards” might seem to be contradictory misconceptions.
In fact, they show just how much confusion there is about personal loans. Some people perceive the rates to be too high, while others assume a personal loan will offer a lower interest rate than their existing credit card debt.
There is just not enough awareness about personal loans being a good option for many people.
So what’s the truth?
If you have an excellent credit score, you could qualify for a personal loan with single-digit interest rates, which is lower than most credit cards.
Personal loans are also a better option than predatory payday loans, which can have an APR of almost 400%.
But if you own a home, a secured loan such as a home equity loan or home equity line of credit will almost certainly deliver a lower interest rate than an unsecured personal loan.
Personal loans just aren’t right for many borrowers
Many people don’t think of themselves as a good candidate for a personal loan. Maybe they feel their credit isn’t good enough or they don’t make enough money to quality.
Homeowners often consider home equity loans or HELOCs before personal loans. And, of course, the 70 million Americans carrying credit card debt month to month may not have thought about a personal loan.
But you could be a good candidate for a personal loan if you have excellent credit and need cash to consolidate credit card debt, pay medical bills or make a large purchase.
With an easy online application process, personal loans are increasingly becoming a smart choice for many borrowers.
What are your personal loan options?
In spite of the myths surrounding them, personal loans continue to grow in popularity.
In the second quarter of 2018, personal loans showed the greatest year-over-year growth than any other type of loan, according to Experian. Personal loan debt increased by 11.4%.
Borrowers looking for cash to pay off revolving credit cards or remodel their home may want to consider a personal loan. If you’re considering a personal loan, check your credit reports from all three credit bureaus and repair any errors to be sure your credit is in tip-top shape so you can qualify for a lower interest rate.
If your score isn’t where you’d like it to be, take time to pay down existing debt to improve your credit utilization ratio and raise your credit score. Avoid opening or closing accounts before applying for a personal loan since these actions could reduce your score.
As your credit score is increasing, use the MagnifyMoney personal loan marketplace to find a loan with the lowest rates and best terms for your situation. Always remember to do your research, consider all your options and make sure your finances are in order before applying for a personal loan.