If you are thinking about taking out another loan, you are not alone.
According to Australian Bureau of Statistics data, people taking out personal loans is on the increase. In fact, in June 2024, Australians borrowed $2.57 billion in personal fixed-term loans, which is the second highest amount ever recorded. This represents a significant increase of approximately 17% from $2.19 billion in June 2023.
It can seem like a workable solution to get a new loan as it is a fast way to access cash, however applying for more money when you already have existing loans needs careful consideration.
To help you think about whether another loan will benefit you overall, here are five questions you might ask yourself before applying for another loan.
1. What is the Reason I am Applying for a Loan?
Most times we will have a clear idea why we want a new loan. It may be that your car needs an upgrade, or the house needs work, or you may just be considering consolidating your debts.
Another loan can seem like such a simple solution to your problem, but a better question may be to ask: do I really need to take out a loan for that purpose?
Needs and wants can be hard to separate, so ask yourself:
- Does my car ‘need’ replacing, or do I really want a new model?
- Is there another way I can earn income or adjust my budget to do up the house instead of borrowing more money?
There is no doubt that things are tough financially for people in Australia due to the inflated cost of living. A personal loan can look like a way to maintain the lifestyle you had before things got tough. Many Australians are turning to personal loans to fund travel and holidays, with $50 million spent in this category in August 2023.
Thinking longer term though, once the holiday is over, or once you start driving your new model car when the old one was doing its job, what you are left with is yet another debt to pay off, and this might become difficult if your finances are already stretched.
2. How Much do I Actually Need to Borrow?
Once you have decided that you have a need for a loan, rather than a want for one, you need to think about how much you need to borrow. Sometimes a lender will offer you more money and it can be tempting to get more than you need.
Work out what you need and then do a deep dive into getting the best price for it. For example, let us say you need a car. You could check out auction sites and see if a low kilometre second hand model is available for a better price. Once you have worked out the best price for the car, then stick to that amount when seeking a loan. Do not be tempted to agree to a higher figure.
Not only will your monthly repayments be lower if you do your homework, but you will also end up paying less in interest over a longer term. Any savings can be put into your emergency fund which is a wonderful way to create a financial buffer that can help in tough times.
3. Can I Afford to Make the Repayments?
This is the most important question. Can I pay back this new loan comfortably, or will I end up giving up necessary living expenses to pay back the debt?
If you do not know how to answer this question, it is time to revisit your budget – simply put – how much do I earn now in income and what are my expenses, including this repayment? You can use the Moneysmart budgeting tool to help you figure it out.
If you have enough left over to repay the loan each month, you might be able to apply. However, always remember that paying off a new loan can affect you and your family’s lifestyle, and it would be better to eat out less often or giving up your gym membership to save the money to make the purchases you want.
4. What is the Interest Rate, Fees, and Features of The Loan?
You may hate reading fine print, but before applying for a loan, it is essential to look at the terms and conditions of the Agreement with a Lender.
Some questions to ask include:
- What is the loan term?
- What is the interest rate? Is interest fixed or variable?
- If I default on payments what is the default interest rate?
- Is the Lender a member of AFCA in case I need to make a complaint?
- Can I exit the loan early?
- Does the loan need to be for a specific purpose?
- What fees and charges are attached to the loan?
The answers to these questions will help you decide.
A fixed interest rate means you know exactly what you will pay across your loan term, but it may be at a higher rate. Variable rates, on the other hand, might start low but could rise, meaning you may no longer be able to afford the repayments.
What is the interest rate? According to Finder, the average rate for an unsecured loan in 2024 is between 10% p/and 11% p/a. The higher the rate, the more you will 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
Fees can add up, so be sure to factor them into your budget.
Make sure you do your own research or reach out to an expert to help you and be aware if your credit score is not great, your options for a low interest loan or any loan at all may be limited.
5. What If I was in Financial Hardship after I got The Loan?
Getting another loan will put a strain on you if you are financially on the edge each payday. Think about how you would manage to pay back the loan if you lost your job or had a period of illness or an accident. Could you continue to make your monthly repayments without your current income?
Without a savings buffer or income protection insurance in place you may find yourself in a position where you must 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 can add up and increase your debt
- Default interest – a higher interest rate that is applied if you do not make your repayments on time!
- A blemish on your credit score – which may make it harder for you to apply for credit in the future.
You can apply to your lender for hardship and request a moratorium or payment holiday for a period if you are struggling, but this is a negotiation with your lender, the outcome of which is not guaranteed.
New Loans Are not to be Taken Out Lightly
Applying for another loan may seem like a clever idea. It is easy cash to get what you want or help you out of a financial problem. But remember, if you are not able to make the repayments, or if the conditions of the loan are unfavourable, a loan can quickly turn into a financial burden, adding more stress and sleepless nights.
So, before you decide to apply for a new loan, make sure to ask yourself the challenging questions and make the right choice.
And if you are struggling with overwhelming debt due to not being able to afford your repayments, contact Solve My Debt Now to discuss your options. We are here to help.
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