In the right circumstances, personal loans can be an effective means of managing your debt, but at their worst, they can support the cycle of debt and put you further and further away from your goals.
It’s a debt-laden time of year for many people, as holiday spending, Christmas indulgences and equipping for back-to-school all take a toll. It’s also a time when personal loan and credit card offers are flying about on nearly every street corner, and it’s easy to feel drawn to that offer of a special interest rate or the chance of winning that new iPad.
If this is you, now is the time to seek debt consolidation help.
We want to arm you so that you go into every contract with your eyes wide open!
Here are 6 common personal loan pitfalls we see people suffer from, and how you can avoid them for yourself.
- Beware high interest rates. Anything over 18% interest p.a. and you are heading into credit card territory. There will usually be a cheaper option available to you depending on your circumstances, especially in today’s competitive market – make sure you negotiate the best rate you can, so you can pay the loan off sooner.
- Be sure you can afford the repayments now, but also tomorrow. It’s easy to look at the best case scenario and think “I can afford that every week”. But what if you get an unexpected bill – let’s say car repairs, or an emergency trip away – could you still afford it then? Could you afford to default a payment, and have to pay double next time? Make sure you have enough ‘emergency funds’ in place at the end of each week, so that you have that buffer for when real life happens. If there’s no wiggle room, you are probably cutting it too fine.
- Read the contract. I repeat, read the contract! Knowledge is power, as they say, and understanding what you’re getting into and how it will affect your living situation is a must. For any loan you’re entitled to take the contract away to look over (and get someone you trust to read it). But if you really want that loan right now, then at the very least make sure you read through and understand it on the day. Or better yet, avoid the sharks and ask one of our Mortgage Advisers to refer you to one of our preferred lenders.
- Secured loan? Prepare yourself mentally to lose whatever you are securing against. Imagine the worst case scenario, where you can’t repay the loan. Are you prepared to lose that car, or that furniture, if you default? Go into it eyes wide open, and understand that even if you’ve paid off say 80% of the loan, if you default then you will still lose the whole car. Not to be taken lightly! Also beware of security against your home, such as a caveat, which is a security that can remain in place for years after the loan is repaid – causing issues when you go to sell.
- Don’t get a ridiculously long term loan. Want to pay that $3000 over 10 years? Think about it! How much interest are you going to be paying over that time? And what happens if you need another loan in another year or so, but you’re still paying for the last one! Whenever taking out a loan, think about the long term and where you want to be in the future.
- Fees, fees and more fees. Another reason to seek professional advice is the myriad of fees that find themselves into many loan contracts. Applicant fees, insurances, documentation fees, cancellation fees, loan maintenance fees, even hefty fees for issuing a statement! It’s another reason to understand the fine print, and know how much of your loan is being chalked up to fees, and whether these are incurred up front or ongoing. There are vast differences between loan contracts and the fees that are charged, so be on guard!
There’s no reason for you to be caught out, and getting on the right path can be easier than you think.
COLE MURRAY’S STANDARD DEBT ADVICE SERVICE COMES AT NO COST TO YOU*
If you would like to talk to Cole Murray about getting debt consolidation help or to be referred to one of our preferred lenders, give our mortgage & loan experts a call today.
*Our standard Mortgage & Debt Advisory service is provided free of charge as we are remunerated (paid) by the banks, but we also provide specialised services and advice for non-conforming, credit-impaired, business and complex cases. After our free initial no-obligation consultation, we will advise you if a fee may need to be charged before we undertake any work. In many cases we may find a simple solution for you.
A disclosure statement is available, on request and free of charge.