Russell Ward Finance Writer
Loans, whether for personal use, the home or to pay down existing debt, can be a convenient way to get the cash you need for life’s financial commitments. However, there are certain lending traps to be aware of and avoid if you want to get the biggest bang for your buck. Here are the top five.
Trap 1: Not understanding the terms and conditions
Borrowing money is a serious commitment and you should try to familiarise yourself with the loan’s terms and conditions, which are key to the provision of the loan. Beware of the finer details, such as repayment length, fees, interest rate, and any interest free periods – typically for household goods. When a lender provides an interest free period, the interest rate that kicks back in after, say, six months will often be higher than with other loans, while missed payments often results in a high rate being applied.
Trap 2: Opting for higher-cost payday lending
Payday loans, also known as cash advances, are high interest, high fee short-term loans that include small amount loans (usually up to $2,000) that must be repaid within a year. The trap with a payday loan is often that when you borrow the sum of money, you have to pay that back, as well as the sky-high interest, within a short amount of time. Many borrowers can’t afford to make the large repayment on time and must take out another payday loan, creating a vicious debt cycle that is hard to break. Having an emergency savings fund for unexpected expenses is the best way to avoid the need for fast cash loans like these.
Trap 3: Choosing Afterpay for its immediate purchase ability
Afterpay allows you to buy something without having to pay until later. Sounds dangerous? It is. The idea is you pay back the amount in four fortnightly instalments over the next eight weeks with your credit card. This can cause issues, as you can be tempted to overcommit - you can afterpay and afterpay on endless purchases because of never having to part with any cash upfront. A lump sum then appears on your credit card once the first payments are due, which you may not be able to pay back, turning an immediate loan into longer-term credit card debt.
Trap 4: The high cost of consumer leases
Consumers leases, while useful for renting or leasing household products such as televisions, washing machines and fridges if you don’t have the cash upfront, can ultimately result in shoppers paying more than four times the regular retail price of the goods over time without ever owning the item. Things to look out for with consumer leases include ensuring the original price of the item is accurate and not overly-inflated, understanding the terms of the contract, and ensuring repayments can realistically be made.
Trap 5: Not shopping around for the best lender for you
It pays to shop around to find low interest rates and fair borrowing terms from a variety of lenders. Do your homework to better understand who you might be borrowing from. For example, loans from finance companies have higher interest rates when compared to a bank loan so weigh up the pros and cons of going with a finance company, rather than a bank. Different lenders charge different fees so don’t jump in with the first lender you find. It’s also important to consider if your bank matches your values. For example, Bank Australia doesn’t invest in the environmentally destructive fossil fuel industry.
About the author
Russell Ward is a professional business writer who has been published in The Huffington Post, The Telegraph, CEO Magazine, Global Living, Mamamia and Thought Catalog.
Please note that this article is not financial product advice and does not take into account any person’s individual objectives, financial circumstances or needs.