3 Misconceptions That Consumers Have About Loans

Introduction

With the hype of emerging FinTech startups disrupting the operations of the banking industry, there is a need to digest the financial jargon behind the complexity of personal loans.

Moreover, the scene becomes even more complicated when banks start to hit back, either through acquisitions of these FinTech startups or via their own schemes such as how Goldman Sachs introduced its own retail bank, GS Bank to compete with online-only banks such as Ally Bank, Discover Bank and Capital One 360 in 2016.

Misconception 1: You cannot get a loan if you have a poor credit history

It is not true to say that because you have a poor credit history, you will automatically be declined when applying for a personal loan.

Each lending institution has its own eligibility criteria, although it is widely know that customer has to possess a credit score of at least a certain number in order to be accepted for a personal loan.

Related: Six Ways to Move on From a Loan Application Rejection

There is some truth in this statement (You cannot get a loan if you have a poor credit score), perhaps perpetuated by lending institutions who wish to be assured that their loans will be repaid, else they are unlikely to make the loan.

Moreover, following beleaguered problems witnessed during the Great Recession, these lending institutions have heightened regulations and implemented tighter internal controls, posing a tougher lending climate for today’s borrowers.

Misconception 2: Every lender roughly has the same rates

Nope.

Depending on the size (largely financial clout) of the lending institutions, interest rates on various loans have a large range and is dependent on several factors which is based on the borrower’s personal situation.

This forms the eligibility criteria which looks at a person’s income, credit score and debt balance.

Related: 5 Practical Ways to Improve Your Credit Score

The question then is, should you go for the lowest rates? Let’s take a look at home loan war in Singapore between DBS and UOB that occurred in late February 2017 (and is still ongoing at time of writing).

Both banks are fighting it out with a zero-per-cent spread under their fixed-deposit home-loan rate (FHR) packages with no lock-in period and a one-time free conversion. It is important to note that these packages are aimed at projects under construction and remains for a limited time only (DBS – March 6 and UOB – date is under review).

While these deals spark good news for homebuyers, there may be other issues to consider when taking out a home loan, such as the mortgage insurance where banks usually earn some profit from.

Related: What to do if your home loan gets rejected?

Misconception 3: Increasing the term of your loan always results in paying more interest

Not really.

You could increase the term of your loan, which naturally comes with a higher interest rate. However, increasing the term may still result in less overall interest if you are able to decrease your rate, and where there are no prepayment penalties.

This is where borrowers can take advantage of these lower rates, on these longer-term loans, but then try to pay them off fast if they are financially able to do so with larger monthly payments. This is commonly seen in student or college loans.

As can be seen, there is some sort of flexibility for the borrower where cash flow difficulties for a time within the term can be eased while being able to reduce the term again in the future when one’s financial position improves.

Related: 5 Types of Loan Seekers You Might Know

Conclusion

Why these misconceptions are dangerous is because they influence the decision-making process of individuals when they explore their options for borrowing to finance a big-ticket item such as a house or a car. Unnecessary debt or overloading on debt may be unhealthy not only for one’s credit score, but also to one’s personal well-being.

This article first appeared in blog.seedly.sg

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