Thinking Of Taking On More Debt? Get Clear On These Things First
Are you considering applying for another loan?
According to ABS data, personal loan lending is close to hitting an all-time high. In September 2022, Australians borrowed $2.295 billion in personal loans – the second highest number in close to twenty years.
While getting a loan is a quick way of accessing cash in our debt-friendly society, borrowing more when you already have existing loans shouldn’t be taken lightly. You need to give it some careful thought.
To help you make a smart money decision, here are five key questions we recommend you ask yourself before applying for a loan.
1. Why am I Applying For This Loan?
Now this one may seem like a silly question, as you probably already know what you want the money for. Perhaps you want to buy a new car, renovate your house or consolidate your existing debts?
Whatever the reason, your answer leads to a more important question: do you really need to take out a loan for that purpose?
- Does your car ‘need’ replacing, or do you simply want a new model?
- Could you adjust your budget and save for your renovations instead of borrowing for them?
- Is a personal loan the best financial option for consolidating your debts?
Due to the rising cost of living, many Australians are now turning to personal loans to fund big household and personal expenses, such as furniture and electronics, with $1.3 million spent in this category in March.
People are also borrowing money to go on holiday now that borders have reopened, and we can satisfy our wanderlust once again.
However, while it’s understandable, taking out a loan for everyday living or non-essential items like travel is never a great idea, especially if money is tight. It’s also an indicator that your finances are stretched.
We don’t want to be a killjoy. But that holiday won’t seem so great when you’re stressing about not being able to afford the repayments for months or years afterwards. Adjusting your budget and saving is a much better way to pay.
2. How Much do I Actually Need?
If you’ve considered the ‘why’ and still want to apply for another loan, the next question to ask is: how much do I actually need to borrow?
If you want the loan for a specific item or project, do your research to find out exactly how much it will cost. Don’t forget to shop around to get the best deals!
For example, get a few estimates beforehand if you’re painting your house. If you want to consolidate debt, list out all your existing debts and their interest rates first.
This is important because you can then request the exact amount you need rather than just taking out what you can get. For example, if a new car costs $40,000, don’t take out $50,000 just because you can – no matter how tempting.
Not only will your monthly repayments be higher, but you’ll end up paying more in interest over a longer term. Plus, if the spare money is sitting there, chances are it will get spent rather than saved!
3. Can I Afford The Repayments?
This one is crucial.
Can you afford the monthly repayments on the loan you intend to apply for?
If you don’t know, it’s time to figure it out. The best way to do this is to look at your budget and weigh up your income versus your expenses – head to Revive Financials’ handy budgeting calculator to figure it out.
You can also use their personal loan calculator to determine your monthly repayments and try their car loan calculator and loan repayment calculator.
If you have the cash to pay it back each month, you may be in a position to apply for the loan. But make sure you also consider how forking out that much in repayments would impact your lifestyle.
Would it mean you can’t eat out as regularly or have to give up your gym membership? If it would, is it worth it?
4. What Are The Terms And Features of The Loan?
Before applying for a loan, it’s important to look at its specifics, typically shown in the small print.
Some questions to ask include:
- Is it a fixed or variable rate loan?
- How much interest will I have to pay?
- How long will it take me to pay the loan back?
- Is it a flexible personal loan?
- What fees and charges are attached to the loan?
- Is the loan suitable for my circumstances?
The answers to these questions will have an impact on your decision.
A fixed-rate means you know exactly what you’ll pay across your loan term, but it may be a relatively high rate. Variable rates, on the other hand, might start low but could rise, meaning you may no longer be able to afford the repayments.
Is the interest rate fair? According to Finder, the average rate for an unsecured loan in 2022 is between 10% p/a and 11% p/a. The higher the rate, the more you’ll pay and the longer it will take you to pay the loan off.
Common loan fees and charges include:
- Application/establishment fees
- Ongoing annual fees
- Monthly fees
- Other ongoing fees
- Documentation fees
- Encumbrance check fees
- Early repayment fees
- Missed repayment fees
- Redraw fees
- Break/early exit fees
Some can be significant, so factor them into your budget.
Whether or not the loan is suitable for your circumstances can be hard to tell. There are many different types of lenders on the market offering personal loans for different types of borrowing.
Make sure you do your research or engage an expert to help you. Sometimes you can get better deals outside of the big banks. Just note that if your credit score isn’t great, your options may be limited.
5. What Would I do if my Circumstances Changed?
Last but not least, you need to consider how you would keep making your loan repayments if your circumstances took a turn for the worse.
For example, what if you lost your job or had an illness or injury that prevented you from working? Could you keep up with your monthly loan repayments without your existing income?
Unless you have a savings buffer behind you and/or certain insurances in place, something we always recommend, you may find yourself in a position where you have to default on your repayments.
While most lenders have a grace period of around 14 days to pay up after the due date, by 60 days it will be considered a default, and you could be subject to:
- Late fees – These will only add to your debt
- Additional interest – This will increase the total amount of interest payable on your loan
- A black mark on your credit score – This can make it harder for you to apply for credit in the future
Some creditors may agree to you paying back much less a month or even put a hold on repayments, but this isn’t guaranteed.
Loans Aren’t to be Taken Lightly
Applying for another loan may seem like a good idea. It’s easy cash to get what you want or help you out of a financial hole. However, taking one on when you really can’t afford it, or when the terms and rates aren’t good, can push you further into money troubles – and keep you awake at night.
So make sure you ask yourself these questions and make the right choice.
If you’re considering applying for a new loan or are having trouble accessing one due to your current financial situation, get in touch with Revive’s team of specialists today on 1800 534 534 to discuss your options.
You can also check out their Loans and Refinancing FAQs.
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