A guide to smarter lending in Australia

When taking out a loan you borrow from a bank or financial institution in exchange for future repayment of the principal, plus interest.

The principal is the amount you borrowed while interest is the amount charged for receiving the loan from the lender. A loan is a loan regardless of where you get it, so you should try to loan SMART. Always adhere to the loan terms and conditions.

When you fail to repay a loan from a registered credit provider, your credit status will be negatively affected just as when you fail to repay the loan from a friend you might lose your friendship.

Things you should do before taking a loan

1. Understand the true costs of the loan - compare different loans while you are still loan shopping. Calculate the true costs of the loan by considering the interest payable, any other charges. Take note of when the payments are due. Find out what happens when you fail to make the repayments like the penalties and other terms that are noteworthy.
2. Check your credit rating and read the small print - know your credit rating before applying for any loan. You can get your credit rating free of charge through one of the major credit bureaus. If you have a bad credit rating, you might be offered a more expensive deal. Make sure you apply for a loan that you are eligible for, to cut out a lot of admin and minimize the chances of a rejected loan application.
3. Know the early repayment charges - most lenders charge you for repaying your loan earlier than the time frame agreed upon. If you know you might want to settle your bill early in the future, it is good to search for a deal that comes without any early repayment charges.
4. You may save more by borrowing more - when you take a larger loan, you will enjoy low-interest rates. Rather apply for a larger loan than several smaller loans. However, never take a large loan when you only need a pretty small amount out of it.
5. Avoid taking many loans and consider consolidation - too many loans make you look desperate or as if you’re experiencing financial difficulties and could jeopardize your chances of being granted a loan. Only apply for loans to those institutions where you meet the criteria and there is a good chance of you securing the loan.

Lenders that offer loans in Australia

You may need money to take a vacation, consolidate credit card debt or pay for a wedding, so finding the best place to borrow money might feel overwhelming. There are plenty of lenders including traditional banks, credit unions, online lenders, payday or car-title lenders, pawnshops, credit cards and even friends or family members.

Loans from the banks

Most banks offer perks like no loan origination fee which often ranges from 1% to 8%. The loan origination fee is used to cover the lender’s administrative expenses for processing your application and paying the money to you. In the bank, you also may qualify for an interest-rate discount.

Credit unions in Australia

Credit unions offer lower fees than banks. The goal for credit unions is to return a profit to members instead of shareholders because they are not-for-profits, they’re only dedicated to serving members. You will only be given a loan from credit unions if you are a member.

Online lenders

In the digital age, online lenders and online loans have sprung up as an alternative to traditional loans from banks and credit unions. Online lenders approve applications fast with money deposited into your bank account in one or two business days.

Borrowing from family & friends

Loans from family and friends might come with no contract or a basic contract and you might get a very favorable interest rate or not have to pay any interest at all. But failing to repay the loan can cause a lot of awkwardness between you and your family members.

The advantages of getting a loan from registered credit providers

As many lenders offer business and personal loans, it is a good idea to take a loan from a registered credit provider. All registered credit providers are regulated by the National Credit Regulator (NCR).

The NCR promotes responsible lending which means that no credit provider should lend you an amount that is more than what you can afford. Here are the benefits of taking out a loan from a registered credit provider:

• Low interest rates: the rates are cheaper since they are tailored according to each customer’s affordability and the type of loan you took.
• Flexibility: you are not told how to spend your money unless you took a loan that is designed for a specific reason like home loans and car loans. When you have encountered an unforeseen circumstance that will lead you into defaulting by not meeting your monthly instalments, you can contact your credit provider to discuss a new payment term.
• Maintain control: you decide whether you take a secured or unsecured loan. You are in control of your loan. No one will decide on your loan on your behalf. You are involved in any discussions regarding your loan.

Things you should never do when taking a loan

After you have taken a large loan, you will be tempted to do a lot of things including those that are not necessary. Hence, it is wise to take out only the amount you need for a certain reason and no more.

• Avoid falling for ’special’ finance deals you can’t afford - finance offers that provide zero or low interest rates on a big purchase might sound like a great deal up until you realize that you are paying more than what you should be paying over the long term. Financing deals can ruin you if you’re only looking at the monthly payment, read all the fine print.
• Never co-sign a loan you can’t afford - when you co-sign a loan, it is practically yours. When the owner of the loan can’t repay it, you will be required to take over the loan and failing to do so might lead to drastic measures being taken.
• Never cash your loan right away - when you cash in your loan right away, this might result in you misusing it. Know the reason you took a loan and stick to it. Make sure you attend to the necessity you have rather than spending carelessly including spending money on gifts and luxuries.
• Never shop when you’re emotional - Many people intend to go shopping when they are feeling down. They use shopping as a stress reliever. When you have a lump sum of money stay away from shops when you are sad you might be tempted to spend more to feel better.

Being smarter about loans is equivalent to being financially literate and improving your finances overall. When you are financially smart you avoid loans and look for other alternatives of raising funds, including cutting all unnecessary expenses.

To loan smarter means that you get to the bottom of the loan and understand the loan agreement completely. Understanding the loan will help you avoid being overcharged, or rather taking out a loan that does not meet your needs and affordability.