Are you in a financial bind and trying to figure out the best loan option for your situation? Some people choose credit cards and others choose loans depending on their situation.
Thanks to the misinformation out there about installment loans some people are scared to even consider this option.
Like with everything else don’t believe everything you read or hear about installment loans. Here are some of the biggest credit myths about installment loans out there. Keep reading to learn the truth so that you can make an informed decision when it comes to your finances.
7 Credit Myths About Installment Loans, Debunked
Before we dive into the myths out there about installment loans it’s important to understand exactly what an installment loan is. This type of loan gives the borrow a fixed monthly payment for the entire term of the loan. This makes it easy for the borrower to know exactly what they will be paying each month.
The loan combines the principal loan amount with the interest rate. The interest rate depends on your credit score. The higher the credit score typically means a lower interest rate.
The most common types of installment loans are auto loans, student loan, mortgage loans, and personal loans. These are only to name a few there and below we will discuss mainly personal loans and student loans while referring to installment loans.
1. You Need a Good Credit Score to Take out a Personal Loan
Many people are under the impression that if they don’t have a good credit score they can’t take out a personal loan. This is simply not true. Yes, a higher credit score will increase your chances and get you a lower interest rate but a lower credit score doesn’t automatically make you not qualify at all.
If an installment loan such as a personal loan is denied it usually isn’t because of a bad credit score. The reasons to be turned down can vary.
It can be declined if they feel that the person doesn’t make enough income to cover the monthly payments for the loan. It can also be turned down if the person applying has really high debt at the time of application.
Keep in mind that personal loans have a shorter repayment period which in turn means that the payments are higher. It also means that you will be paying a larger percentage of the principal every single month.
2. Long Application Process
Before taking out a loan required multiple trips to the bank and days of waiting for the final decision whether they would lend you the money or not. Those days, fortunately, are long gone. Nowadays the process is more simple and you don’t have a long application process.
Thanks to the internet most applications can be done from the comfort of your home without physically going into the lenders building. The only thing that slows down the process is if the borrower doesn’t have all the information they need at the time of applying.
If you gather everything you need ahead of time then you will make the application process go much quicker.
3. Can’t Use My Loan to Reduce My Other Debt
When applying for an installment loan such as a personal loan people are sometimes under the impression that they can’t use the money to reduce the other debt they’re carrying. But, if you use the money you’re borrowing will carry a lower interest rate than the debt you’re trying to pay off then why not use it to pay off that other debt?
There is no say where you spend the money once you borrow it. If you have credit cards with high interest rates and your installment loan is offering you a lower interest rate then you can use the installment loan to pay off the credit cards and have one monthly bill instead of several.
If you are choosing to go this route don’t fall into the temptation to use your credit cards and max them out because they all have a $0 balance now. The key here is to not take out more debt than you can handle. That’s when finances will start becoming a burden.
4. You Need Collateral
A misconception is that you need to put up collateral such as a property, or vehicle that you own in order to take out an installment loan. Back in the day, it was customary for a farmer to take the deed to his land to the lender in order to borrow money. This was done by the lender to ensure that the borrower was going to pay back the money because they didn’t want to lose their land.
In today’s society, this is no longer the case. You don’t normally have to put up the title for your vehicle or use your home as collateral for an installment loan. Most lenders look at the borrower’s income, credit history, and monthly payments.
5. Installment Loans Are Cheaper Than Credit Card Debt
This can be true in most cases but not in all cases. With an installment loan, you will know upfront the number of payments you will make and for how much. You will also know before accepting the loan how much you will pay in total between the principal and the interest by the time you’re done paying off the loan.
With credit cards, the payments will fluctuate monthly and if you pay the minimum every month the amount of interest you pay for the life of the credit card loan can add up to be much higher than an installment loan.
But if you happen to have a credit card that has a 0% APR for a promotional time then this might be a cheaper option than an installment loan. If the 0% APR is for let’s say 12 months and you are able to pay off what you charge in 12 months then this way will be cheaper than an installment loan.
It’s important to gather your numbers before making a decision on using a 0% APR credit card or taking out an installment loan.
6. Student Loans Hurt Your Credit
As mentioned earlier student loans fall into the installment loan umbrella. With over $100 billion taken out every year in student loans, it’s no surprise that there are many people paying back money for this type of installment loan. There’s a misconception that taking out student loans hurts your credit score but this is simply another myth.
Taking out a student loan won’t hurt your score. What will hurt your score is if you default on your student loan. This is the same for any type of loan – if you default then the credit headaches begin.
On the contrary to this myth if you’re paying back your student loans on time this will impact your credit in a good way. If you ever find yourself in a tight situation make sure to contact your student loan lenders because they usually are very willing to help keep you out of default.
7. Online Personal Loans a Take Long Time for Approval
This is another myth floating around that if you apply for a personal loan online it takes much longer to receive an approval. Thanks to the internet taking out an installment loan online is actually much faster than its ever been.
Some lenders will give you an instant decision once you submit your information. Some might ask you for pay stubs or your identification before sending you your money but they will approve you before you submit this.
Nowadays it’s not uncommon to be approved the same day and receive your money by the next business day if you choose to have the money go directly into your bank account. This is a huge difference when you compare it to a traditional bank loan when the entire process from beginning to end can take anywhere from one week to 45 days.
Ready for Your Installment Loan?
Have you fallen for any of these myths in the past?
Now that you have learned the 7 credit myths about installment loans above do you feel better equipped to take out an installment loan? Understanding the difference between facts and myths helps all of us make more informed decisions.
There’s so much misinformation out there about personal loans, auto loans, student loans, and installment loans in general. Knowing the truth you can confidently choose the best options for your finances.
Ready to take out your installment loan? Fill out your information online today we’d love to help you.
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