Diana Clément: The best ways to borrow money
Banks, building societies, and credit unions offer relatively transparent loans without the particularly nasty hidden fees that others charge. Photo / 123RF
Borrowing money to buy things is too easy to do.
Some methods of taking out a loan are better than others and arming yourself with the facts and shopping around can really pay off.
Everyone’s situation is different and it’s a great idea to consult with other people such as financial mentors or budget advisers before taking out a loan, says Susan Taylor, Managing Director of Financial Services Complaints Limited (FSCL), a complaints resolution service that can act as a mediator. when loans go bad.
If you need to borrow, some of the best avenues are:
â¢ Of the family. A low rate or interest free loan or a secured personal family loan is ideal for some. The mom and dad bank can help a young person get started in life, whether it’s for school, a car or a first home. Family loans are usually the cheapest in the long run, and if you’re having trouble, you may have to put your payments on hold.
â¢ From the bank, the building society or the credit union. All three offer relatively transparent loans without the particularly nasty hidden charges or costs so common with other types of borrowing. Mortgage companies and credit unions are not for profit, so they have your best interests at heart.
â¢ Against your home. Recharging your mortgage to five percent can be cheaper than a personal loan. Make sure this part is on a short term loan. Paying interest over 25 years instead of three, five or 10 years is more in the long run. Also, be wary of using your home as a slot machine to pay off things you don’t need, including credit card debt accumulated from unnecessary spending.
â¢ Don’t borrow. The best loan is the one you don’t take out. Too often, we borrow for things we don’t really need, could save money for, or to buy used.
Borrowing can be fraught with pitfalls. Some of the worst loans are:
â¢ Truck shops and loan sharks. These suck the lifeblood of poor communities and borrowers who have gone through hard times – sometimes charging hundreds of percent interest. Worse, the prices of phones, school laptops and other goods are often increased on trucks compared to the usual shops on Main Street.
âPeople would be in a better position to save the money they pay each week in truck store / door-to-door business loan repayments and then purchase the goods directly from a retail store,â says Taylor.
â¢ Purchase on HP or with modern layby. Even so-called âinterest-freeâ loans have fees and may be subject to lump sum payments at the end.
âBalloon payments are when the borrower has to make a large lump sum payment at the end of the loan term because they have basically only paid interest for the life of the loan,â says Taylor.
Interest-free hold is becoming very popular, but if you miss a single payment you will be hit with late payment fees.
â¢ Loans you haven’t looked for. Sometimes we are drawn to fancy advertisements or just inertia. We can take court funding from the car or throw unforeseen expenses such as funeral expenses on the credit card because we are busy.
âThe consumer will often charge the entire expense on their credit card, and they will start to incur high interest charges, 25-30% per annum,â says Taylor.
“If they had contacted their bank or another lender about a personal loan, they might have been able to get a much lower rate.”
â¢ From the family or with a family surety.
âEven if the person you’re guaranteeing the loan to is someone you trust, you never know what might happen in the future,â says Taylor.
“Job Loss, Health Problems, and Relationship Breakups.”
In one case investigated by FSCL, a mother had guaranteed her son’s $ 4,000 loan, even though she herself finds herself in a precarious financial situation. When the son defaulted, the finance company sued the mother for over $ 8,000, which included the original loan, fees, interest, and loan protection insurance.
Regardless of how you choose to borrow, always consider the fees you will be charged, not just the interest rates, Taylor explains.
“In particular, look at the setup fee and monthly / weekly account fees.”
You should also compare the total amount that you will pay over the life of the loan. Lenders are required to disclose it under section 17 of the Credit Agreements and Consumer Finance Act.
Ask about the extras that will be charged on the loan. Auto loans often come with insurance, but you can get a better deal by arranging your own.