Are you considering applying for another loan?
According to ABS data, personal loan lending continues to rise. In June 2024, Australians borrowed $2.57 billion in personal fixed-term loans, marking the second highest amount ever recorded and representing a significant increase of approximately 17% from $2.19 billion in June 2023.
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 high cost of living, many Australians are turning to personal loans to fund travel and holidays, with $50 million spent in this category in 2023 August.
However, while it’s understandable, taking out a loan for a holiday 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 a loan, the next question to ask is: how much do I actually need to borrow?
If you need the loan for a specific item or project, do your research to find out exactly how much it will cost and be sure to shop around for the best deals. For example, if you’re planning to paint your house, get a few estimates beforehand. Similarly, if you’re looking to consolidate debt, start by listing all your existing debts and their interest rates to determine the total amount you need.
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 our handy budgeting calculator to figure it out.
You can also use our personal loan calculator to estimate your monthly repayments, as well as our car loan calculator and loan repayment calculator for more specific needs.
If you have the cash flow to repay the loan each month, you might be in a position to apply. However, it's important to consider how these repayments might affect your lifestyle.
Would it mean eating out less often or giving up your gym membership? If so, is it worth it?
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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 2024 is between 10% p/a and 11% p/a. The higher the rate, the more you’ll pay in interest, and the longer it could take to repay the loan.
Typical fees and charges to be aware of 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
These fees can add up, so be sure to 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 consult 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 experience an illness or injury that prevented you from working? Could you continue to make your monthly repayments without your current 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 might agree to lower your monthly repayments or even pause them temporarily, but this is not 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. But remember, if you’re not in a position to manage it, or if the terms aren’t favourable, a loan can quickly turn into a financial burden, adding more stress and sleepless nights.
Before you commit, make sure to 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 our team of specialists today on 1800 534 534 to discuss your options.
