There comes a point in nearly everyone’s life when they need to take out a loan - buying a car, getting a mortgage, even going on holiday. But all too often, this borrowing will cost more than you expect - and we don’t just mean the interest rates.
Newshub spoke to the loan specialists at Avanti Finance about what a borrower should do before, during and after taking on a loan to avoid unexpected costs and ensure their borrowed dollars keep making sense.
According to Avanti Finance, there are five important factors you should consider:
1. Get advice before you apply
Working out how much money is coming in is easy. The trick is knowing how much is going out, how often, and how much spare cash you will have left to repay a loan. But even after all that careful planning, a sudden, unexpected life event can catch us all out. Both you and the lender will need to work out if you can afford to repay the loan and still be able to manage your other expenses.
If your budgeting calculator is tying itself in knots, try the free, independent budgeting service at Money Talks.
2. Keep an eye out for establishment fees
Establishment fees are one-off, upfront payments at the start of your loan. But many people forget they exist until the end of the application process. While they are usually small compared to the size of the actual loan, they do add to your costs.
Some lenders put the establishment fee onto the loan balance, and some require you to pay it up front. Either way, you will pay it for most loans, so don’t forget to include it in your budget.
3. What happens when ‘life happens’?
When unexpected costs come up, you may be unable to make a repayment on your loan. Missing a repayment is bad enough, but then you can end up with extra default fees and interest as well. It’s important to understand these before you sign on the dotted line rather than assume life will go perfectly.
Ask what happens if you miss a repayment and what you can do to avoid the worst of the fees. Lenders can sometimes stop additional fees – but only if you get in touch with them. They may also be able to help get you get back on your feet with an application for hardship. This can mean your payments are temporarily stopped, reduced, or the term of your loan extended to make the payments more affordable for you.
Find out what their processes are before you sign and don’t be afraid to call if the worst does happen during your loan.
4. Bank fees on overdrawn accounts
If you have an automatic repayment on your loan and it tries to take the payment from an account without enough cash in it, you may be charged a fee for a bounced payment or an unauthorised overdraft.
This isn’t something to bring up with your lender, but rather to check with your bank to see what their fees are. Again, ideally this won’t ever happen, but it’s good to know how much a bounced payment could cost you.
5. Early repayment and exit fees
Life changes aren’t always negative and sometimes you find yourself with more money than expected. And, wisely, you may decide to pay off your loan. However, some lenders will charge early repayment fees for extra repayments, as well as exit or ‘break’ fees if you close your loan early. Check with your lender to see if these exist and how much they are.
So, let’s go through it again; choose the right loan for your circumstances, understand all the fees and charges, make sure you can afford it, and most importantly – talk to your lender if things change.
At the end of the day Avanti Finance shares a simple message: borrow from a lender that emphasises communication, flexibility and understanding - because life doesn’t always go smoothly.
This article is created for Avanti Finance