What questions should you ask yourself before getting a loan?

NOTE: If you are going to sign for a loan with someone else or go guarantor for a loan, see Fact Sheet: Going Guarantor or Fact Sheet: Getting a Loan with Someone Else .

Do I need this loan?
Do you have any other options aside from getting the loan? For example, save for a less expensive car instead of buying a new one.

Can I afford the loan?
You should consider the following:

• Can you afford the repayments? Consider how much you earn and your current expenses. As a guide your repayments should not be more than about 35% of your income. For example, if you earn $500 p.w (in the hand) and the repayments were a $1200 a month (your income: $2000, repayments are $1200: repayments = 60% of your income) you will have great difficulty affording the loan repayments.
• Is it likely that my income or expenses will change during the term of the loan? For example, if you are planning to change career to a lower paying job then you will not be able to afford the loan repayments in the future. In this case, you should either not get the loan or plan to pay the loan off before your leave or get a loan for a lesser amount that you know you will be able to continue to repay. Remember: the lender only assesses your current ability to repay, it does not consider the future!

Are there any unexpected costs you should consider?
For example, repairs to your car or house.

Have I shopped around?
This is highly recommended for a number of reasons:

• Deciding to shop around gives you time to consider your options. It is very useful to make a decision that you will shop around. This means you will take your time and make a decision in your time. You decide not to be pressured. When a sales person says you must take a deal now you can say: "No I'm shopping around and comparing deals and I am not in a hurry!" Even if you are in a hurry the "shopping around attitude" is worth having.
• You can compare prices. Loans are a big purchase! Loans always cost money to repay. It is worth comparing loans and getting the best deal for you. For example, if you are buying a car, it is often cheaper to arrange a loan through a bank or credit union rather than taking the finance arranged through the dealer.
• You get more information about your options. Shopping around does not only let you compare price it allows you time to find out about all the options that are available. For example, after visiting a number of banks you find that converting your existing home loan to an equity loan was going to be more expensive than just arranging an increase on your home loan to renovate and buy a car.

It is recommended that you get a copy of your credit report before applying for a loan. This is just to make sure that there are no listings on your credit report that would affect your chances of getting a loan. For information on how to get your credit report see Fact Sheet: Your Credit Report.

So what questions should I ask the lender?

• What is the total amount of my loan?
• What is the total amount that will be repaid? That is, how much will the loan cost you all up? For example, for a home loan of $150,000 over 25 years you would usually have to repay around $292,000. To work out how much the loan will cost you, multiply the amount of the repayments quoted by the months in the loan. For example, you are borrowing $150,000. The monthly repayments are around $973 a month for a 25 year loan. Lenders often have loan repayment calculators you can use to check this. So the amount you will have to repay is 973 (repayment) x 12 (months) x 25 (years) = $291,900.
• What is the interest rate on the loan? Check the amount of the interest rate and whether the interest rate is fixed or variable (this means it will change depending on changes in market rates).
• Is the loan secured? If the loan is secured the lender has taken a mortgage over goods/car or a house. A mortgage means that if you fail to make the loan repayments on the loan the lender may take the mortgaged goods (or house) and sell them to repay money owed. As a general rule it is easier to obtain secured credit than unsecured credit and it will usually be cheaper.
• How long will it take to repay the loan?
• How much are the loan repayments and how often do you have to make them? Can you make additional repayments?
• Do you have to pay for any insurance? How much will it cost?
• If I decide to pay out the loan early is there a fee? More and more lenders are charging a fee for repaying the loan early. When the interest rate being offered is fixed there will usually be an early repayment fee if you repay the loan early or even make additional repayments. Early repayment fees are also usually charged when you get a home loan with an introductory rate (often referred to as a "honeymoon"rate).
• If I miss a repayment(s) does the interest rate change? Sometimes the interest rate increases by 2 or more percentage points if you do not make a payment by the due date.
  If you are getting a loan for personal purposes, for example, a home loan or personal loan, the loan contract must contain all of the above information.

Warning: Do not sign a document stating the loan is for business purposes if the loan is going to be for personal purposes.

Types of loans

You should also ask questions about what types of loans are available. Do not assume that there is only one type on offer as there will usually be a range you can choose from. This is particularly true with home loans. When choosing the type of home loan you should take care that the loan suits the way you manage your finances.

For example, it is popular at the moment for lenders to offer loans where you will save money because you put all your salary into the loan and only withdraw your living expenses. This type of loan works well for consumers who take care with their money and budget carefully. If this is not you, then consider getting another type of loan.

Many home loans also offer redraw facilities - where you can make additional payments and then take the money back again if you need it. This can be a very handy feature as you are reducing your interest payments while the extra funds are in the account. You must ask how much it will cost to have this facility and whether you will pay an additional fee each and every time you redraw funds. See also Fact Sheet: Home loans - Line of Credit Loans and Loans with Redraw.