By Mukesh Malhotra

Have you thought about taking out a loan but were discouraged from doing so because of what you have heard or read?

With the numerous myths out there from borrowing a loan to having a credit card, I am here to help you debunk some of the most popular loan myths.

Did you know that taking out a loan can have a positive impact on your credit score and finances? Therefore it’s important that you understand how loans work.

Myth 1: A loan will damage your credit score

According to ClearScore, 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.

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.

However, if you manage your loan responsibly for example by repaying your loans on time and in full, it will do wonders to your credit score. This is because lenders will see that you are capable of handling debts and you could even get pre-approved for certain loans. This is because all loan repayments are recorded on your credit report.

Therefore, even if you see that your credit score has dipped initially when you apply for a loan, paying it back responsibly will have an opposite effect. This will show that you are financially responsible.

Myth 2: It’s an expensive way to borrow

By default, borrowing money is always more expensive than having your own money. This is because lenders will want something in return of lending you money such as interest rates. Therefore it’s important that you shop around and compare the deals that you are getting so that you can find one that suits your needs.

It’s important to note that the better your credit score and financial health, the better the deal that you will get on a loan offer. With many financial organisations you can see the APR you’ll be offered on certain loans before you apply with guaranteed rates, so that’s one less thing to worry about.

And the great thing about loans is that your repayments will (usually) be fixed, so you know exactly how much you’ll owe each month.

To see whether a loan is fixed or variable, check the APR panel next to the product in your offers.

Not being biased here but borrowing from a credit union has an advantage as the interest rates are usually lower than other financial organisations.

Myth 3: The more loans you apply for, the more likely you are to be accepted

Unlike other types of applications such as job applications, don’t fire out applications for loans at random hoping that a lender will offer you credit. This will do more harm to finances (and credit score) than good.

This is because each time you apply for credit, it adds a ‘hard’ search to your credit report that will bring your score down as it will appear that you are desperate for credit.

The trick is to check how eligible you are for a loan (you can do this in your offers) before you apply. This way, you’ll have an idea of how likely you are to be accepted so you won’t be going in blindly.

(Don’t forget that unless your rate is guaranteed, your eligibility score is an estimate and any there’s still a chance you could be rejected.)

I suggest you look at the APR and terms when comparing loans, to make sure you’re applying for the right one for your circumstances.

Myth 4: To get a loan, you need to have a high credit score

When you are trying to apply for a loan, it’s not the end of the world if your credit score is not as high as you would like. You will be happy to know that there is a lending option out there for everyone.

For instance, “Bad Credit Loans are designed specifically for people with lower credit scores.”

With such a loan, you agree to put a possession in place such as your home as collateral to the debt.

The catch is that the lender will charge a high interest rate on such a loan, therefore, making them an expensive way to borrow money. This is because you are viewed as a ‘risky’ borrower by the loan company so will charge you more in interest so that they can cover their own backs.

Therefore it’s advisable to repay such loans as quickly as possible to prevent overpaying. Therefore, make sure you can afford to keep up with repayments before applying for a loan in the first place.

To find out what type of loans you’re eligible for, you can visit websites such as the Money Saving Expert. You can also look out for a credit union near you as they will be able to help you find a loan product that is suitable for your needs and usually has a lower interest rate.

Another tip is that before you apply for a loan, you should try and improve your credit score in one of the following ways:

1. Use a credit card little and often
2. Keep your credit utilisation low
3. Fix mistakes on your report
4. Get on the electoral roll
5. Avoid making multiple credit applications in a short space of time
6. Use an eligibility checker
7. Get your name on some bills if it isn’t already
8. Pay your bills on time
9. Look out for fraud
10. Make sure you have a good overall view of your finances

Myth 5: The APR you see is what you get

APR 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 that you see advertised alongside a loan is usually representative. This means that the lender would only offer this rate to 51% of people who apply for a loan while 49% could be offered a higher APR.

The lenders just show the average rate however the APR that you will be offered will depend on your personal financial situation. Sometimes the difference between the representative and actual APR can be quite significant.

Unfortunately, you won’t know what the real APR would be therefore always look out for loans that have a guaranteed rate and also tidy up your finances before applying for a loan. This is because the better your finances look to the lender, the lower the APR you’re likely to be granted.

If you are looking for an affordable loan that will suit your needs, have a look at our range of loans where you can also save as you borrow. Find out more.