Borrowing money to buy things is all too easy to do.
Some methods of taking a loan are better than others and arming yourself with the facts and shopping around can really pay off.
Everyone's situation is different and it's a really good idea to consult with others such as financial mentors or budget advisers before taking out a loan, says Susan Taylor, chief executive officer of Financial Services Complaints Limited (FSCL), a complaint resolution service which can mediate when loans go bad.
If you do need to borrow, some of the better avenues are:
Start your property search
• From family. A low- or no-interest loan or a guarantee of a personal loan from the family is ideal for some. The bank of mum and dad can help a young person get a start in life, be it for study, a car, or a first home. Family loans usually cost the least in the long run and if you fall on hard times there is a chance you could suspend payments.
• From the bank, building society or credit union. All three offer relatively transparent loans without the especially nasty hidden fees or costs so common with other types of borrowing. Building societies and credit unions are not for profit, so they have your best interests at heart.
• Against your home. Topping up your mortgage at five per cent can be cheaper than a personal loan. Make sure that that portion is on a short-term loan. Paying interest over 25 years instead of three, five or 10 it will add up to more in the long run. Be wary, too, of using your home as a money machine to pay for stuff you don't need, including credit card debt built up from unnecessary spending.
• Don't borrow. The very best loan is the one you don't take out. All too often we borrow for things we don't actually need, could save up for, or could buy second hand.
Borrowing can be fraught with dangers. Some of the worst loans are:
• Truck shops and loan sharks. These suck the lifeblood out of poor communities and borrowers who have fallen on hard times - sometimes charging hundreds of per cent in interest. Even worse, the prices of the phones, laptops for school and other goods are often jacked up on the trucks compared to regular high street shops.
"People would be better placed to save the money they pay each week in loan payments to the truck shop/door to door sales company, and then buy the goods outright from a retail store," says Taylor.
• Buying on HP or with modern layby. Even so-called "interest free" loans have fees attached and can have balloon payments at the end.
"Balloon payments are where the borrower is required to make a large lump sum payment at the end of the loan term because they've essentially only been paying interest during the term of the loan," says Taylor.
Interest-free layby is becoming very popular, but miss one single payment you'll be hit with late-payment fees.
• Loans you didn't shop around for. Sometimes we're enticed by fancy adverts or simply inertia. We may take the car yard finance or throw unexpected expenses such as funeral expenses on the credit card because we're busy.
"The consumer will often load the entire expense onto their credit card, and they'll start incurring high-interest costs, 25-30 per cent per annum," says Taylor.
"If they'd approached their bank or another lender about a personal loan, they might have been able to secure a much lower rate."
• From family or with a family guarantee.
"Even if the person you are guaranteeing the loan for is someone close to you who you consider trustworthy, you never know what could happen in the future," says Taylor.
"Job loss, health concerns and relationship breakdowns."
In one case investigated by FSCL, a mother had guaranteed her son's $4000 loan, despite being in a precarious financial situation herself. When the son defaulted the finance company chased the mother for more than $8000, which included the original loan, fees, interest and loan-protection insurance.
However you choose to borrow, always look at the fees you'll be charged, not just the interest rates, says Taylor.
"In particular, look at establishment fees and monthly/weekly account fees."
You also need to compare the total amount you'll pay over the life of the loan. Lenders are required to disclose this under section 17 of the Credit Contracts and Consumer Finance Act.
Ask about the extras that will be loaded onto the loan. Car loans often come with insurance, but you may get a better deal by arranging your own.
- New Zealand Herald
