Comparing Loans

The variables that will apply to your loan that you need to consider when making any decisions are as follows:

• 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.

If you don't already have one, write up a monthly budget to help you plan and track your financial position and to make future decisions.

Being prepared

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.

Potential pitfalls

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 lender.

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.

Your loan application is usually the first impression that you make to a lender so the visual appearance of a manual application is important.

Upfront fees

Avoid paying any fees in advance of receiving your loan - unless it is to a well-trusted financial institution.

Be conservative

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 with them.

Don't sign!

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 settlement date.

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 the lender.

If the need arises to contact the lender (for any reason), always make a physical note 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 contract.

Around one in ten people wind up paying more than they should due to miscalculation and/or oversight.