Consumers are increasingly seeking out personal loans as a low-cost way to cover unexpected expenses. In fact, according to TransUnion, total personal loan balances in the U.S. are expected to reach all-time highs of $156.3 billion by the end of 2019.
However, you may have come across several myths that could be obscuring your understanding of this financial product and its uses. Here’s what to consider.
6 things that aren’t true about personal loans
The myths surrounding personal loans can range from interest rates to qualifications and everything in between.
All banks offer the same personal loan product
Not all personal loans are the same. You could find two personal loans — each with the same term length and borrowing limits — but get different interest rates when you apply. That’s why getting preapproved is an important step in researching lenders; doing so could give you a glimpse into the terms you may qualify for.
You should also consider lenders’ fee structures. For example, the personal loan with the lowest interest rate isn’t necessarily your cheapest option if it comes with a high origination fee.
Personal loans always carry low interest rates
Personal loans can provide lower rates than many credit cards, but that doesn’t mean the rates are exceptionally low. At least with unsecured personal loans, which aren’t backed by any collateral assets, lenders see them as a high-risk venture and may charge interest rates that range from 5% to 36%. That’s a wide margin.
Your rates may vary depending on your credit score, but lenders generally prefer borrowers seeking an unsecured loan to have a score that is higher than average.
You need a high credit score to qualify
A high credit score isn’t necessarily required to be eligible for a personal loan.
“While we recommend having a 660 credit score, there are personal loans available that don’t require one quite as high,” said Andy Misek, a digital marketing specialist at the Chicago, Ill.-based Finance Guru. “It will have a higher interest rate attached but you can still get the loan.”
Of course, if you want to qualify for some of the lowest rates, finding ways to improve your credit score can’t hurt. If you’re strapped for time, though, you may need to consider how to get a personal loan with bad credit.
You need to borrow the full amount offered to you
Don’t be mistaken: You don’t have to borrow the full amount of money offered to you by a lender. And in general, you shouldn’t borrow the maximum amount simply because it may feel like you’re making life easier for yourself in the short term. Doing so can be a bad move, especially if you’re still in school, said Kris Alban, the San Diego-based executive vice-president of financial wellness company iGrad.
“It will feel like the opposite once you’re out in the real world,” Alban said. “The smarter strategy is to borrow the bare minimum for expenses and fund the rest by boosting your income.”
Consider borrowing the bare minimum you need. Why? For one thing, you want to avoid taking on unnecessary debt. After all, you’ll be paying interest on that debt each month. You also have to consider the fact that your financial situation can change. You may feel comfortable making payments when you first take out a personal loan, but a financial emergency, such as job loss, could quickly put you in a pinch.
Personal loans are a great option if you’re looking to refinance debt and repay it quickly
If you’re looking to repay your debts in less than a year, it might not make sense for you to refinance them with a personal loan. This is because personal loans typically charge an origination fee of 1% to 5% percent of the loan amount, which you should take into consideration when calculating your overall interest savings, said Joseph Toms, president and chief investment officer at the San Mateo, Calif.-based Freedom Plus.
“However, if you know it will take you longer than a year, significant savings are possible with a personal loan, even if you factor in the origination fees,” he said.
Personal loans are your best option for managing debt
Someone carrying a significant debt of $7,500 or more, who does not earn enough income to make minimum payments, would have a difficult time qualifying for a personal loan. “They should look into other help, such as debt negotiation (settlement) or credit counseling,” Misek said.
Dealing with debt settlement companies, who negotiate with your creditors to reduce the amount you owe them, can be a risky endeavor; another option is to try negotiating with them yourself. A non-profit credit counseling agency such as American Consumer Credit Counseling can also help you put together a workable debt management plan as well as a budget you can live on.
Still looking for a personal loan? Here’s what to consider
Here’s some advice on how to get a personal loan, according to Toms.
Ask for details on the lender’s terms, rates, fees and options. Different loan options will offer different terms and fees. Some lenders offer discounts when there’s a co-applicant with excellent credit scores, low debt and good income, or if the applicant has a certain level of retirement savings. There could also be a discount offered if you’re using the loan to pay off higher-interest credit card debt will arrange for the lender to make those payments directly.
Ask about the lender’s late fees and whether they offer a grace period. Find out the fees for unsuccessful payments, personal check processing and other miscellaneous charges.
Understand that applying for a personal loan will involve a credit check. Personal lenders want to see a history of paying debts on time and gain confidence that you have the income to repay what you borrow. Although there is no perfect credit profile for consumers seeking a personal loan, and many lenders will consider those with poor credit scores, interest rates may vary greatly.
If your FICO Score is below 640, lenders may provide a very high interest rate to you. “And that may not help you get out of debt,” Toms said. “In fact, it may cause you to fall further behind.”
Know that some lenders may require a minimum number of years of credit history. A certain minimum threshold of income also is a common requirement.
Be ready to show that you can repay the loan according to the payment schedule. Different lenders may have varying thresholds for the debt-to-income ratio they would like to see. “You must be making at least minimum payments on current debt and show you have the financial capability to make the personal loan payments,” Toms said.
Interested in a personal loan?Here are the top personal loan lenders of 2019!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.
†Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at reviews.lendingclub.com
**Based on approximately 60% of borrowers who received offers through LendingClub’s marketing partners between January 1, 2018 to July 20,2018. The time it will take to fund your loan may vary.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|5.75% – 16.24%1||$5,000 - $100,000|
|7.69% – 35.99%||$1,000 - $50,000|
|7.99% – 35.89%*||$1,000 - $50,000|
|5.99% – 24.99%2||$5,000 - $35,000|
|5.99% – 29.99%3||$7,500 - $40,000|
|6.79% – 20.89%4||$5,000 - $50,000|
|9.99% – 35.99%5||$2,000 - $25,000|
|6.95% – 35.89%6||$1,000 - $40,000|
|6.99% – 18.24%7||$5,000 - $75,000|
|9.95% – 35.99%8||$2,000 - $35,000|