In this Budgeting 101 post we will be looking at “The Smart Way to Borrow”
In Part 1 we talked about your credit file, what it is and what can affect it, now lets talk about “the Smart way to borrow”
Everyone at one time or another is likely to get a loan for something, it may be a home loan to buy their dream home or a car loan to replace their old clunker or a personal loan to help pay for the renovation on their home or go on a holiday that is long overdue. There is absolutely nothing wrong with borrowing money, just make sure you don’t overdo it, don’t take out more loans than you can afford (in most cases you won’t be able to borrow funds if you are unable to afford it).
The best thing to do if you are unsure if you can afford a loan is head to your Financial Institution (FI) website. Most FI’s have great budgeting applications and calculators to help work out if you can afford to borrow money. Keep in mind these are just rough estimates. Below are a few Calculators from the larger FI’s in Australia –
NAB Calculator, ANZ Calculator, St George Calculator – Commonwealth Calculator – Westpac Calculator
First things first, sit down and think, do I need this loan? Do I really need a new car or do I want one because the chick next door has a new car and you want one too! If you feel like you are struggling financially, it is best to wait til you are back on top of things before looking into a loan. The next thing to think about “is now the right time for me to borrow money?” Are you in a stable and secure job? Are you planning to take extended time off of work to have children or go on a round the world trip you have always wanted to go on? Do you have any illness’s that may stop you from working?
Once you have considered your personal situation, hop online and get the phone numbers for 5-10 FI. Sit down and call each FI and ask for a quote. Make it clear (in a polite manner) that you are only interested a quote and not making an application. The questions you want to ask are –
1. What is the interest rate?
2. Is this a fixed or variant interest rate?
3. Do they have any ongoing fees?
4. What are the repayments? (It’s best to line up the repayments with your pay week, unless you have funds in your account at all times).
5. Will you be charged any fees if you make any extra repayments? (some places charge you more for paying extra…. Crazy hey)
6. Are there any fees if you were to pay your loan out early? Are there any balloon payments?
7. Is the interest charged on the balance of the loan? – compounding interest eg: If you have a loan for $20k and you make a lump sum payment of $10k, your repayments are calculated on the $20k but you will be charged interest on the $10k balance. Therefore paying your loan off quicker.
8. What are the fees and charges associated with making an application?
9. Do you offer direct debit? (sometimes it can be easier to set up a direct debit, rather than having to remember to make the payment)
10. How long do you have approval for? (this is something you would ask if you have not found your car yet)
11. What information do I need to provide for approval? Eg: some FI’s might ask for payslips or bank statements.
Once you have all the answers, put them into an excel spread sheet and compare them. It’s best to get a loan where you can make extra repayments or pay the loan out early without being penalized. That way you can make extra payments of $10 or $20 a week if you have the extra funds or an occasional lump sum payment. By comparing these loans you can see which is the best loan for you! Once you have worked out what loan offers the best rate and conditions, call to make an application or head into a branch.
Things that can assist in making your application stronger would be, saving for 3-6 months before making a loan application to show the bank that, yes you can make the payments and it also helps your assets position, be realistic when giving expenses, don’t say you never go out and have dinner or do things you enjoy, FI’s don’t usually believe this and it will appear that you are lying on your application. FI’s are required to use a minimum expenses index, this differs depending on your situation eg: single, married or have dependants. Don’t lie about anything on your application, this will not only annoy the FI’s but it also makes them less likely to “fight” for you if the loan is borderline.
If you are elbow deep in debt it might be a good idea to contact your FI and talk about refinancing or consolidating your banking. This will show that you are responsible and it will make it easier for you to pay off these debts without drowning.
Smart borrowing is also making sure you have correct protections in place if something were to happen to you. When my husband and I got our home loan, we made an appointment to get all of our insurances and superannuation sorted out. Now we have Life, income, TPD (total and perm disability) and critical illness cover so that we know if something was to happen we would be okay and our partner/family aren’t going to be left dealing with our debt.
Disclaimer: I’m not a financial planner and I’m not qualified to give advice. This is a personal blog and most of the content here is based on my own experiences and opinions from working within the financial industry I hope to use this site to help others. My opinions are my own and I am not influenced by anyone else.
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