If you are thinking about taking out a loan for a home, a car or anything else,
for that matter, the following tips are designed to help you in understanding
and comparing your loan options.
The variables that will apply to your loan that you need to consider when
making any decisions are as
- The total loan amount that you need to finance;
- The annual interest rate applicable to the loan;
- Whether the interest rate is variable or fixed for the term of the loan
- The number of months (or years) over which you will repay the loan;
- The amount of any equity or cash deposit that you will put towards the loan;
- Any additional fees charged by the lender/originator or broker;
- Loan Insurance if applicable.
It's important to understand that, when you take out a loan, the lender is simply selling you the money for less
than it cost them.
More than just interest rates
When comparing loans, many people make decisions based entirely on the
interest rate quoted without considering other things like set-up fees,
penalties for paying out the loan early (or late), etc.
Before you lock yourself into any loan, you should ensure that you consider
and compare the total costs associated with the loan
over it's term as well as any flexibility associated with the loan in the event
that your circumstances should change.
Keeping on top of your finances
Make sure that you have budgeted properly for your loan repayments.
don't already have one, write up a monthly budget to help you plan and track
your financial position and to make future decisions.
Before applying for a loan, you should consider cancelling any credit cards
that you are not currently using.
This is because, when assessing your
application, the lender will calculate your total liabilities to include the
limit, not the balance of any credit line that you have.
E.g. if you have a
credit card with a $20,000 limit - but you owe nothing, the lender will include
the $20,000 as a liability in determining your eligibility for the new loan.
Be very careful when considering or comparing loan finance offers that contain
the following features:
- loans with a short repayment term;
- large up-front charges;
- excessive interest rates;
- residual (back-end or "balloon") payments;
- high charges for late payment;
- penalties for paying your loan early.
Many finance offers claiming to have "no upfront fees" do charge a penalty if
you want to pay out the loan early. Repaying your loan early might be good
financial management and you should be rewarded for it - not penalised by your
If you are unsure, talk to your broker or lender to establish exactly what
happens if you want to make advance repayments on your loan or to pay the whole
loan out ahead of schedule.
Making a good impression
If you are applying for a loan in writing (as opposed to an online
application) always ensure that your handwriting is neat and easily read.
loan application is usually the first impression that you make to a lender so
the visual appearance of a manual application is important.
Avoid paying any fees in advance of receiving your loan - unless it is to a
well-trusted financial institution.
If the loan you are taking is a line of credit - e.g. a line-of-credit
mortgage or a credit card, you should only seek a loan limit to meet your needs.
Don't be talked into a higher credit limit than you actually need because it may
cause you difficulties down the track.
Choosing a loan
Find a loan
from a lender and/or finance brokerwith a good reputation within the industry.
You should also ensure that they are appropriately licensed with the Australian
Securities and Investments Commission (ASIC).
ASIC is the primary regulator for the finance industry in Australia and all
providers and intermediaries involved in the credit process must be licensed
Always read loan documentation carefully and thoroughly before signing
anything. If you haven't read them, or if there is anything that you don't
understand in any documents that you receive from the lender or broker, simply
do not sign.
There should be no need for you to be hurried into a commitment and you
should ask to receive copies of any documentation well in advance of the loan
Keeping a record
Once you have your loan in place, make sure that you maintain your own
records of your repayments independent to any periodical statements issued by
If the need arises to contact the lender (for any reason), always make a
of exactly who you spoke to, the date, the time and a brief explanation of the purpose and the
outcome of the call.
This information may be invaluable down the track because
you may need to rely on it.
Pay attention - or it could cost you money!
Where possible, reconcile your loan statements as soon as they arrive to make
sure that your repayments, interest charged are in accordance with the loan
Around one in ten people wind up paying more than they should due to
miscalculation and/or oversight.