Personal Loan Myths

4 common myths about personal loans

If you have never had a personal loan before, it can be very confusing. Many common misconceptions can deter you from getting one, but the truth is that personal loans do have their benefits when you need extra cash.

1. Personal loans are hard to get
2. The APRs are too high
3. Personal loans can be used for any purpose
4. Personal loans hurt your credit score

Myth 1: Personal loans are hard to get

“Don't assume you can't get a personal loan if you have less-than-stellar credit,” said Andrea Woroch, a consumer finance expert. “Even consumers with fair or bad credit may qualify for a personal loan.”

New credit accounts for about 10% of your FICO score.

You may still be able to get a personal loan even if you have bad credit. Some lenders specialize in bad credit loans, offering credit-builder or secured loans designed to help you get approved and build credit.

“You can compare options of personal loans for bad credit at sites like BadCredit.org, where you can review loan amount, interest rates, term and consumer ratings,” Woroch advised.

What is the minimum credit score for a personal loan?

The minimum credit score for a personal loan can vary based on the lender. For example, Capital One suggests a minimum credit score of 580. SoFi asks for a 610 score. Achieve recommends an even higher minimum score of 620 to 680 to qualify.

What else do lenders consider?

Your credit score is not the only factor that lenders consider. Lenders also consider a handful of other factors, including:

• Debt-to-income ratio
• Income
• Employment
• Loan amount
• Loan term
• Credit history
• Collateral
• Market conditions

Pro tip

Avant is one lender that will accept poor credit, requiring a minimum credit score of 550. Upstart is even more flexible, requiring a score of only 300. Just be aware, so-called “bad credit loans” typically come with higher interest rates and fewer term options.

Myth 2: The APRs are too high

Payday loans are notorious for their sky-high interest rates. That is not the case with traditional personal loans. 

The average interest rate for a 24-month personal loan in May 2025 was 11.57%, according to the Federal Reserve. In comparison, credit cards hold an average 21.16% interest rate, and payday loans can exceed 400% interest.

Not all personal loans carry high APRs.

If you have bad credit, you may face higher APRs. Borrowers with good credit will likely receive more favorable terms, as long as they meet the other loan requirements.

“It's a big misconception that all personal loans are alike,” Woroch said. “In fact, each lender offering a personal loan will offer different terms that can impact what you pay and owe in the long run. Not to mention, each individual consumer may qualify for different terms based on their credit profiles.”

Household debt is on the rise in America

From 2024 to 2025, total household debt increased by $185 billion, totaling $18.39 trillion by the second quarter of 2025. Of that debt, approximately $540 billion is attributed to credit cards, personal loans and other consumer finance loans.

» RELATED: How does debt-to-income ratio work?

Myth 3: Personal loans can be used for any purpose

Personal loans can be used for any number of purposes, offering great flexibility compared to home mortgages and car loans.

A personal loan can be used for several large purchases, including:

• Home improvements and repairs
• Debt consolidation
• Medical bills
• Emergency expenses
• Moving costs
• Weddings
• Vacations

What can't you use a personal loan for?

Personal loans can carry somewhat obvious limitations. Specifically, you can’t use the funds to bankroll an illegal act. You also can’t use a personal loan to pay for school or a down payment on a house. That’s what student loans and mortgages are for, respectively.

When researching personal loan lenders, be sure to ask about loan limitations to ensure you are getting the right type of personal loan for your needs. Additionally, personal loans are not for investments, new businesses or gambling.

• Investments. Market fluctuations make investments extremely hard to predict. There is always the risk of loss, and you will still have to pay back your loan — with interest — even if you lose your funds in the market.
• New business. A business loan or business credit card is a better option. There are also no liability protections. So, someone can sue you personally instead of the business.
• Gambling. Even if gambling is legal in your area, you cannot use a personal loan for gambling. It is not a way to grow your wealth, diminishing it instead.

Myth 4: Personal loans hurt your credit score

When your lender runs a hard inquiry to pull your credit report, your score may decrease slightly in response. However, this is only temporary. With regular, timely payments, you can improve your credit score.

There are actually several benefits of a personal loan. A personal loan can be a great way to quickly get the funds you need. It can also establish a responsible credit history so you can be approved for other loans in the future.

Don’t apply to too many lenders

Repeated credit checks can hurt your credit score, making it harder to qualify. Additionally, hard inquiries can stay on your credit report for up to two years, impacting future borrowing needs.

Instead, prequalify with your lender first. This does not affect your credit score and may not show the exact terms you will receive. It gives you an idea of what to expect, so you know whether to apply for a personal loan.