Applying for a loan requires careful evaluation not only on the bank’s part, but also on yours. After going through different loan offers, it is best that you’re equipped with the right knowledge so as not to fall into a continuous cycle of debt. Let go of old beliefs, and make room for factual information to manage your expectations. Here are five common myths in applying for a loan and the truth behind them.
Myth No. 1: Only people who can prove they have money can borrow money.
Or as American actor Bob Hope once famously said: “A bank is a place that will lend you money if you can prove you don’t need it.” You’ve probably been warned by friends or family members that you need to possess a certain amount of cash in your bank account to apply for a loan.
Truth: This may apply to secured personal loans where some banks would require to set up a bank account with minimum deposit amount. These days, you will only need to show proof of credibility. Provide complete information of your background, income, and work experience to qualify for the loan you wish to apply for. The bank will conduct a background check to verify the information you provided.
In the end, you will be granted the loan if you have provided credible proof that you’re able to pay it back on top of interests at a given period, and not about how much cash you currently have.
Myth No. 2: Pre-qualification guarantees the loan amount.
Truth: Banks pre-qualify individuals with good credit score. The loan amount you declared on the application does not necessarily guarantee the same approved loan amount. You will go through the bank’s due diligence process and your credit history will be reevaluated. You may end up getting a lower loan amount, according to the bank’s assessment of your ability to pay off the loan.
Myth No. 3: It’s better to borrow from private lenders.
Truth: Applying for a loan stems out of need. Out of this need, the next step is to determine your loan repayment capability. Everything will therefore depend on your research and canvassing on which lenders will give you the lowest interest rate and fair terms.
For instance, established businesses will find that bank loans are the best option because they meet the proof of income requirements. These are usually businesses with a steady profit of at least two years. Pre-revenue or low-revenue businesses may have to do more research to determine the needs of the business.
If you only need capital to jumpstart your business, it’s best to consider both traditional bank loans and private lenders, whichever offers the best package. If your business is anticipated to have a steady growth in a few years, then capital venture or private lenders may be able to support the business better than a bank loan.
Myth No. 4: A bad credit score eliminates your chance of getting a loan—ever.
Truth: Bad credit score is a huge deterrent in applying for a loan, but that is not the end of your credit line. You can always regain your good credit score by paying your delinquent loan or credit card. It may take a long time, but there’s nothing better than being able to turn things around for your credit record.
You never know when you will need a loan. Whether it’s for housing, car, or personal loan, clearing your debt is a huge step towards financial freedom.
Myth No. 5: Low-interest rate loans are always the best choice.
Truth: Additional fees may be added on top of your monthly amortization and total loan amount, so it is important to be aware of your bank’s terms. Interest rates are important factors in finding the right loan, but you also need to consider other factors such as loan terms, processing fee, or the application of prepayment fee. A prepayment fee is applied after you’ve fully paid your loan prior to the term you initially agreed on.
Everything should depend on your loan purpose and need. Don’t choose a longer payment term when you know you can repay the loaned amount at a shorter period. You may end up paying higher interest rates for much longer payment terms.