Ever thought about taking out a loan but have been discouraged by what you’ve heard? There are countless myths around loans and credit cards, which is why TailerMade Pensions is here to debunk the top ones so you can make an informed decision.
Taking out a loan can have a positive impact on your credit score and finances (if used responsibly) so it’s worth taking the time to understand how they work.
- Can I obtain a loan as an expatriate?
- Do you need a high credit score to get a loan?
- Are loans an expensive way to borrow?
- Is the APR I see the APR I get?
We debunk some of the most common myths about loans to help you decide whether a loan is the right credit choice for you. Read our guide to find out what’s finance and what’s fiction:
- Being an expatriate you cannot obtain a loan or mortgage
Well, as expatriates ourselves we can promise you this is not the case. Of course, if you have no footprint in the country (i.e. your only contact in the country is a rented property) then do not be surprised if you are refused a loan.
However, if you live here, and work here paying tax and demonstrate that you are going to remain here for the period of the loan, or you can offer security (such as property) then you can obtain a loan.
- The APR you see is the APR you’ll get
If you’ve not heard of an APR, it stands for Annual Percentage Rate, and is essentially the total cost of borrowing. It’s a good way to predict how much the loan will cost you overall, as it includes the interest rates and any other fees that come with the loan.
The APR you see advertised alongside a loan is purely representative (we sometimes call it ‘rep’). 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 you’ll actually be offered depends on your own financial circumstances, which is why lenders just show the average rate.
The difference in cost between the representative and real APR can be significant. Frustrating, we know. So how do you see exactly how much you’ll have to pay before you apply?
Generally, the better your finances appear to a lender, the lower the APR you’re likely to be offered. So it makes sense to look at how you can improve your credit score before you apply for a loan.
- Taking out a loan will damage your credit score
This one’s a bit of a catch 22. When you apply for credit, a ‘hard’ search will be added to your credit report, which can have a negative impact on your credit score in many countries. Too many hard searches (or rejections) in a short space of time are likely to bring your score down, as they indicate to anyone who looks at your report that you could be overly reliant on credit.
On the other hand, managing your loan responsibly can do wonders for your credit score. Once you’ve been accepted for a loan and you make repayments in full and on time, you should see your score increase. This is because your loan repayments are recorded on your credit report and lenders will be able to see that you’re capable of handling debt, which will reflect well on your credit file.
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’s definitely not a reason to avoid applying for a loan; in fact, it can be a great way to prove how financially responsible you are.
Don’t forget that you might even be pre-approved for certain loans with, say, your existing bank. You can see whether you’re pre-approved by looking at the eligibility score on your bank website.
- Loans are an expensive way to borrow
Borrowing money is, by nature, always 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 you money, and personal loans can come with higher interest rates than other forms of borrowing.
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, and lenders know that they are the only option for some people which means they can charge as much as they like.
But loans don’t have to cost the earth – it’s best to shop around and compare a range of deals to find the one that suits your needs and budget. The better your credit score and financial health, the better the deal you’ll be offered on a loan.
- The more loans you apply for, the more likely you are to be accepted
This one’s important: it’s never a good idea to fire out applications for loans at random in the hope that at least one lender will offer you credit. It’s not a numbers game, and this is likely to do more harm to your finances than good.
Each time you apply for credit – be that a loan, a credit card or something else – a ‘hard’ search 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’ve applied for lots of others as you won’t look like a stable borrower.
We suggest you look at the APR and terms when comparing loans, to make sure you’re applying for the right one for your circumstances.
- You need a high credit score to get a loan
While a good credit score could be your ticket to a better deal on a loan, it’s not the end of the road if your score’s not as high as you’d like it to be. There are lending options out there for pretty much everyone. For example, ‘bad’ credit loans are designed specifically for people with lower credit scores. You can choose from an unsecured loan or a secured loan, where you agree to put up a possession (like your property) as collateral for the debt.
The catch is that lenders tend to charge higher interest rates for unsecured loans, which can make them an expensive way to borrow money. This is because if you have a poor credit score, the loan company will view you as a risky borrower, so charging you more in interest covers their backs.
If you do take out a ‘bad’ credit loan, try to repay it as quickly as possible to avoid paying over the odds in interest. It goes without saying that, as with all forms of borrowing, make sure you can afford to keep up the repayments before you apply for the loan in the first place.
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