Separating the Wheat from the Chaff: Debunking 4 Popular Myths about Installment Loans

If you have an idea what a car loan, mortgage, personal loan and even the much-loathed student loan is, then you already know about installment loans!

With this loan type, you borrow a particular amount of money, agree on the repayment schedule with the lender and finally start servicing it back on a regular schedule. Incredibly, for every amount repaid, the balance reduces, which, of course, is a good thing since it doesn’t earn interest as time goes.

Easier than breathing, right? 

 But owing to the glamor around this loan, worrywarts spread false information, perhaps to entice the unsuspecting to take a short term installment loan from them. One will tell you that by diligently repaying your student loan, your credit score will dramatically shoot up. Another one will be all over, convincing you that you cancel that credit card and BOOM, your score increases.

The two are not the only myth about installment loans, apparently. As you are about to discover, there are countless half-truths and urban myths surrounding this type of loan. And the sad thing is, seems everyone thinks they are true.

Let’s look at the four most popular myths about installment loans:

  1. When it comes to mortgage loans, they’ll say you can’t be in debt and still buy a home

 There are much more bizarre installment loan myths, but this one is perhaps the most prevalent. And I’ll agree a debt can affect your ability to own a home. But it CANNOT impede you from buying one!

If this were the case then all these souls walking up and down before us, hiding their student loan debts or servicing car loan payments, would have been jailed long ago. Or probably they would not be looking rich. See, the bottom-line that mortgage lenders look at is the size of debt vis-à-vis the cadre of one’s entire income, what’s generally known as debt-to-income ratio.

  1. They’ll tell you to meet the STRICTLY 20% down payment

This canon was scrapped a while ago, making it convenient for anyone to own a car or a home via an installment loan. Some would require as little as 6% of even a mere 3.5%, especially the popular FHA loans. Others like the Veteran’s Administration incredibly don’t need any down payment at all. Just remember that with a bigger down payment, you increase your chances of getting the loan.

  1. They’ll tell you to always carry a credit card balance

Just because you have a student loan and you’re desperate to increase your credit limit doesn’t mean you believe this lie. Don’t starve so that some few bucks can “keep your card active” when doing so is utter stupidity. Instead, “use credit to build credit” if you know what that means.

Simply put, apply the credit utilization concept of 30% or less. Remember, by keeping a smaller credit balance, your credit utilization ratio automatically reduces, something that subsequently boosts your credit score. Use the card and pay off the debt promptly, period!

  1. Once you have a negative entry as a result of that installment loan, it will take 7 years to erase it! 

If you’ve never encountered this lie, then you haven’t traveled these roads. The truth here is, any negative entry can be erased before the seven years are over. There are various ways of doing it, including writing to them with explanations. You dispute with facts and that red sign is cleared!

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