Personal banking advice

Everything you should know about taking a personal loan

There are a lot of misconceptions about personal loans. Because of these ingrained myths, many are missing out.

Don’t be one of them.

Properly executed, a personal loan can be a great financial tool to improve your way of life. But before we can talk about that, we need to first clear the stage.

The common misconceptions

Here are the top 3 personal loan myths you need to erase from your memory.

Myth #1: Personal Loans Have Crazy Interest Rates

It all comes back to your credit score, but even if your score could use some improving, personal loans aren’t like payday loans. Payday loans can go as high as 400%!

Personal loans? Nothing close to that.

Terms and conditions are going to vary with each borrower, but if you have a good credit score you might get a rate around 7%. If your score could use some improving, that number might go up to 16% (which is still lower than most credit cards).

Those rates might not be as good as mortgage rates, but personal loans don’t come with a 30-year repayment period. 60 months is the max. So, while there is a cost involved, it’s much less than many other lending products on the market.

Myth #2: Personal Loans Are Only Given to People with Excellent Credit

Myth #3: You Can Only Use a Personal Loan for Certain Things

Though all of the personal loan myths we’re going to talk about are duds, this one perhaps is the greatest dud of them all.

Yes, many loans on the market must be used for specific purposes (an auto loan must be used to buy a car; a mortgage must be used to buy a house), but personal loans can be used for just about anything (provided it’s legal, of course). There might be some stipulations from the lender, but there won’t be many, and they more than likely won’t affect you.

When you request to take out a personal loan, the number one thing that will affect the bank’s decision to lend to you is your credit worthiness and your debt-to-income – not the reason you need a personal loan.

Of course, that question will come up, but it will be more of a conversational piece than anything else (and, depending on your answer, you might be steered towards a better loan product that suits your needs).

When it comes to a yes or no, the bank is going to look primarily at your ability to pay back the loan and whether you have a positive history with debt.

The advantages of taking a personal loan

Many people use personal loans to make a big purchase, which is certainly fine if you can comfortably make the monthly payment; however, the best reason to ever take out a loan is if it will improve your financial situation.

On that note, here are the top 3 reasons to ever take out a personal loan.

#1: Increase the Value of Your Home

Getting a personal loan to remodel your home can lead to what is often referred to in the real estate world as ‘forced appreciation’ — meaning the value of your home may go up after you do work on it.

Should you do so, you would gain more equity in your home.

Decide to sell your home, and it would likely sell for more than it would have before the remodeling. Plus, you can enjoy the benefits of the upgrades while you still live there.

Do your research before assuming a financed remodel would pay for itself. Look at local real estate trends and see what’s selling nearby and for how much. Do any of them have updates similar to what you were planning? Are they nearby? Are they a similar square footage?

A forced appreciation can also be beneficial for a future cash-out refinance should you decide to stay in your home once you remodel it.

#2: Consolidate Your Debt

Do you have multiple loans and credit card bills due each month? Do they all have different interest rates and due dates?

A personal loan can simplify your life and, more importantly, help you get out of debt faster.

Personal loans usually come with lower interest rates than credit cards and many other loans, which means you won’t pay as much in the long run. Additionally, you’ll only have one payment to make each month.

Sometimes one of the most important keys to getting out of debt is simplification through consolidation.

#3: Cover an Emergency Expense

Sometimes there are situations where you have to spend money that you don’t necessarily have.

Whether your car needs an all new transmission, you need to pay medical bills, or sadly pay for the burial of a loved one, a personal loan can help you do just that, but at an interest rate that’s not predatory.

Many Americans often resort to paying unexpected expenses with a credit card; however, if you know you won’t be able to pay it off the next month, it really doesn’t make any sense to do that.

Another option people often resort to is payday loans, but this is perhaps the worst thing you could ever do to your wallet. Payday loans can have interest rates as high as 400% (as well as numerous fees), and so too often they create a vicious cycle of debt that’s all but impossible to get out of.

Yes, personal loans may take a little longer to process, but you won’t be paying on them for nearly as long.

Is a personal loan right for you?

Several factors must be considered to answer this question.

Herring Bank has a team of dedicated loan officers who will tell you whether a personal loan is the right financial route for you to take.

If it’s not, and there are better options for you, they’ll tell you!

We want to provide you real value.

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