From the common myth that debt consolidation will help you save money on your debt to the common belief that 0% interest credit cards are a way to borrow for free, we dispel Australia’s most common loan myths and misconceptions.
#1) Loans with lower interest rates are cheaper
This is perhaps the biggest myth that Australians still believe to date and this problem is only made worse by loan comparison sites that highlight low interest rate offers by lenders.
Although a low interest rate does mean you will pay less in interest on your loan, it does not mean you will pay less for the loan overall because the total cost of your loan is dependent on the fees charged by the lender as well as the interest rate.
Initiation fees and monthly or annual service fees can be quite hefty and when added up, may negate the lower interest rate completely. Use the APR or Annual Percentage Rate to compare loans as this percentage includes interest rates and fees.
Alternatively you can review all fees that will be applicable to your loan and compare these manually but this will require quite a bit of effort and may be more time consuming than you can imagine.
#2) Loan comparison sites will help you find the cheapest or best loans & credit cards
Loan comparison websites have become the norm for Australians looking for cheaper and more competitive credit and loan features and many of us are led to believe that whichever options we’re offered when comparing on one of these sites is the best or cheapest offer on the market.
While these sites can indeed be helpful, this is simply not always the case. This is because loan comparison sites are also geared towards generating profit and may include loan options and lenders at the top of your “best” list because these are the “sponsored” options. This means that if you take out a loan by following the link to the lender’s site, they will receive a commission.
You also need to be aware of the fact that these sites do not include all available loan options on the market, only a selection of options. This means there may be a loan or option available that is not part of their database and you will miss this option entirely.
That being said, loan comparison sites are a great place to begin your search to credit and you can employ certain steps to ensure you don’t fall for one of their sponsored options inadvertently.
This includes properly comparing options by making use of loan APR and comparing three to five of the top options instead of just going for the very first option presented.
#3) Consolidating you debt will save you money
There are essentially three ways to consolidate your debt. This is by refinancing your mortgage, using a debt consolidation loan and through the use of a balance transfer credit card. Apart from the use of balance transfer credit cards, debt consolidation almost always ends up costing you more overall.
When it comes to using your mortgage to consolidate debt, the longer loan term means you pay a lot more over the course of the loan and with debt consolidation loans, you also generally get a longer loan repayment term and therefore pay more overall.
With consolidation fees and penalties, when all things are said and done, you may very well pay more on your consolidated debts than you would have if you didn’t consolidate.
#4) 0% interest credit cards are a way to borrow for free
While 0% interest credit cards are a great way to save on interest, you are not borrowing for free and will have to pay annual fees on the card. In addition, once the interest free period expires the revert rate will apply and this is usually higher than that charged on low interest credit cards.
If you doubt your ability to repay your full balance within the interest free period, you may be better off opting for a low interest credit card which will typically come with lower annual fees too.
If you opt for a balance transfer credit card with a 0% interest period, bear in mind that any new purchases will carry the standard purchase rate interest and any payments you make will go directly to service this fee.
#5) Brokers charge you for their services
When it comes to home loans, it is a good idea to make use of a broker as they know the market and will be able to collect and review loan offers from a wide range of providers and therefore help you find the most competitive.
Contrary to what many Australians believe, brokers do not charge clients for their services but instead receives an origination commission from the lender that approves your mortgage.
When it comes to other types of loans, the same applies. Brokers will not charge you to find a personal or bad credit loan and will instead receive a commission from the lender that services your loan request.
#6) You need good credit to access loans
Many Australians believe that if they have a poor credit rating they cannot access finance but, this is simply a myth. If you have a bad credit history you can still access a range of bad credit options from lenders that specialise in offering bad credit finance. You may have to offer security for the loan or get help from a guarantor to secure the finance you need but you can still access credit!
That being said, those with a poor credit history will almost always receive higher interest rate offers on loans than those with good credit. This means that you will pay more overall for your loan which is the price you pay for having an adverse credit history.
#7) You should make multiple loan applications to compare & save
Making multiple loan applications is one of the biggest mistakes that Aussies make when looking for credit to suit their needs. Not only will these loan applications leave a mark on your credit file but it will lower your credit score overall.
Not only will making multiple loan applications affect your credit but it is extremely time consuming and will only help you compare a very small range of options.
A better way to go about comparing loans is to use a loan comparison site or look for a reliable broker who will be able to access loan offers on your behalf while you only need to make a single loan application.
#8) You need a 20% deposit to secure a home loan
Many Australians still believe that in order to secure a mortgage you need to provide a 20% deposit. This amount has dropped to between 5% and 10% as more low deposit mortgage options have become available.
That being said, the lower your deposit the higher your repayments will be. This may make your home loan much less affordable and may require you to look for a home in a lower price bracket.
That being said, the higher your deposit the lower your loan amount will be which will save you an enormous amount of money overall which is why putting down a 20% or higher deposit is a smart move.