There are countless myths about loans and credit cards that influence our decisions daily.
Taking out a loan can have a positive impact on credit reports and scores if used responsibly, so it is worth taking the time to understand how they work. This ultimately has a positive impact on improving access to finance as well as improving standards of living.
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1. The APR you see is the APR you’ll get!
APR stands for Annual Percentage Rate and is essentially the total cost of borrowing. It is a good way to predict the overall cost of the loan(s), as it calculates the interest rates and any other fees that come with the loan(s).
The APR advertised alongside a loan is purely representative. This means the lender only has to offer this rate to 51% of people who apply for the loan, and the other 49% could be offered a higher APR. The APR offered depends on various variables used to calculate the interest rate for example income, credit score, etc. Lenders display the average rates.
The difference in cost between the representative and real APR can be significant. Generally, the more positive the applicant’s finances appear to a lender, the lower the APR may be offered. So it is important to look at how you can improve your credit score – and fix any mistakes on your credit report – before applying for a loan or a postpaid product and service
2. Taking out a loan will damage your credit score
This one is a bit of a catch-22. It may be beneficial to run a self-credit check before applying for loans or postpaid products. This enables consumers and businesses alike to understand their credit standing and correct possible anomalies before applying for credit. A self-check is regarded as a “soft” inquiry and does not affect credit reports or scores.
When applying for credit, a ‘hard’ inquiry will be added to one’s credit report, which can hurt your credit score. Too many hard searches or rejections in a short space of time are likely to bring your score down, as they infer over-reliance or dependence on credit.
On the other hand, managing loan repayment responsibly can do wonders for your credit score. Once accepted for a loan and ensure repayments are made in full and on time. This will positively impact credit reports and scores. This is because loan repayments are recorded on your credit report and lenders, upon review, will be able to see that you honor obligations when due.
So, while you might see your score take an initial dip when you apply for a loan, paying it back responsibly over time should have the opposite effect. It is not a reason to avoid applying for a loan; in fact, it can be a great way to prove how financially responsible one is
If you want to avoid any unnecessary rejections on your credit report, read our guide to boosting credit scores: becoming more eligible for a credit product
3. The more loans you apply for, the more likely you are to be accepted
This myth is regarded as the most widely believed: It is hardly a good idea to apply for loans at random or multiple loans at the same time, in the hope that at least one lender will offer credit. Unlike some other cases where multiple tries may guarantee a different outcome, in the loan application, is not a numbers game. Multiple applications are likely to do more harm than good as every search conducted is recorded on credit reports.
Each time you apply for credit – be that a loan, a credit card, or something else – a ‘hard’ inquiry will be added to your report. Too many of these in a short space of time is likely to bring your score down as you’ll appear desperate for credit. Not only this, but lenders will then be less likely to accept your application if they can see you have applied for lots of others as you won’t look like a stable borrower.
4. Loans are an expensive way to borrow
Borrowing money is, by nature, may be more expensive than using money that you already own. There’s no such thing as a free lunch – lenders will always want something in return for lending money, and personal loans may come with higher interest rates than other forms of borrowing.
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Remember that not all loans are made equal. For example, higher-cost short-term loans, or ‘payday loans, tend to come with much higher interest rates and fees than other loans. This is because they’re intended to be used for urgent, emergency expenses.
But the overall cost of acquiring loans does not have to be expensive – it is best to discuss with account managers and conduct thorough research to compare a range of loan products and interest rates to identify the one that suits the intended purpose. The higher the credit score the lower the interest rate. The great thing about loans is that monthly repayments are usually fixed, so the exact monthly repayment value is known.
5. You need a high credit score to get a loan
While a good credit score may be the ticket to a better interest rate on a loan, it is not the end of the road if the applicant’s credit score is not as high as expected. There are lending options out there for pretty much everyone. There are loans designed specifically for people with lower credit scores to help boost their credit ratings. These are often with additional conditions that need to be met by the applicants and may range from higher interest rates to, the provision of guarantors and collateral.
It remains of utmost importance to maintain the agreed terms and conditions of repayment of the loan or repay it as quickly as possible to avoid going into default. Therefore, as with all forms of borrowing, ensuring that before applying for the loan in the first place:
A self-check is conducted to understand one’s creditworthiness.
Great thought goes into identifying the reason for taking the loan.
Understand the applicable terms and conditions of the loan.
