31/10/2012 - 04:20

Do your homework before borrowing

31/10/2012 - 04:20

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THERE has never been a better time to review your current personal lending requirements. Interest rates are on the move downwards, and now is a good opportunity to assess your rate.

Banking has never been so competitive, with banks offering enticement packages to attract new clients. Are you missing out?

Personal lending has become a battleground for your business and there are many loans to choose from. The trick is to pick the loan that best suits your needs now and into the future, as your circumstances may change. Whether it is a home loan, personal loan or a car loan, you need to understand what it is you are being offered.

Personal loans are generally unsecured and, as such, a little easier to get. Income, job security and credit history play a large part in the approval process. These loans are generally the most expensive forms of credit and come with terms ranging from 12 months to seven years.

What many people don’t realise is that store credit at Harvey Norman, Freedom etc is actually a high interest rate personal loan; the store picks up the interest bill from what is usually GE Money, but if you exceed your interest-free term the rates can be as high as 24 per cent with additional monthly fees. If you are coming to the end of a term for store credit you should consider refinancing the facility with a lower-cost alternative.

When buying a car it is wise to source a finance approval before looking around at the car yards. This will set your budget and ensure you are not carried away with buying a car you can’t afford. Be wary of hidden costs if you decide to secure finance from a car yard, including transactions fees, various insurances and the fact that the dealer will not negotiate on the price of the car based on a particular financing package.

There are also options in relation to buying the motor vehicle that could save you a great deal of money. Some firms offer a buying service that allows them to search Australia wide for the best deal, and usually this is at no or very little cost to you.

Another option is a novated lease, whereby you lease a vehicle through a leasing company and the repayments and costs of running the car can be taken from your pre-tax salary.

At the end of the term the car can be handed back and a new vehicle negotiated. This can be very tax effective and can mitigate the loss incurred when you sell a car and the residual value is less than the loan payout. The lease company can often source a vehicle at fleet discount that will also save you on costs.

When it comes to buying a home, it pays to always understand your own personal budget and what you believe you can afford on a home or home and land package. The surplus funds available to family (A) on one salary may be completely different to that of family (B). One family may have a taste for champagne and private schools and another enjoy baked beans and the government school system. Neither is wrong but each will have a different level of disposable income based on the same income.

A financier will apply an average to all borrowers and, as such, many will be offered well in excess of what they can afford. This sounds ideal but in reality will only increase the levels of stress in the family and the possibility of default.

Having said this, however, for those with sufficient income the ability to borrow 100 per cent of the purchase price of a home with no real deposit can still be a reality of modern banking.

Understand the all-up rate offered and whether you would be better fixing the rate for a period of one to three years. You need to be very sure that the loan will not need to be repaid in full during the fixed term period as there can be large costs to finalise a fixed-rate loan early. Understand the total package being offered and all the fees and costs that will apply during the term of home loan.

The bottom line is to understand the facility you are signing up for, or alternatively use the services of an advocate that will source, understand and explain the services for you. Used correctly, personal borrowings can make dreams come true; just don’t let your dreams turn into nightmares.

Paul Rowe is chief executive of Razor Business Solutions, which has been advising businesses nationwide for 15 years.
Contact Paul on: prowe@razorbs.com.au | 0406 800 928

 

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