The key questions to ask yourself and your lender before you sign a loan agreement, so that borrowing helps rather than harms.
A loan can help you buy a home, grow a business or meet an important expense. It can also become a heavy burden if the repayments are more than you can manage. Before you borrow, take time to ask the right questions, both of yourself and of the lender.
Questions to ask yourself
Do I need to borrow? Could I save for this instead, or wait until I can afford it? Borrowing for something with lasting value, such as education or equipment for a business, is different from borrowing for everyday spending.
Can I afford the repayments? Look at your monthly budget. After essentials and existing commitments, is there enough left for the repayment, with some room for unexpected costs?
What if my income changes? Think about what would happen if you lost work, your business had a slow month or support from family stopped for a while.
Am I borrowing to repay other debts? Taking a new loan to pay an old one can lead to a cycle of debt. If this is your situation, speak to your bank about your options early.
Questions to ask the lender
- What is the total amount I will repay, including interest and all fees?
- What is the interest rate, and is it fixed or can it change?
- Is interest charged on the full amount for the whole term, or on the reducing balance?
- What fees apply, such as processing, insurance or early repayment charges?
- What happens if I miss a payment, and what charges apply?
- Is security or a guarantor required, and what could happen to it if I cannot repay?
- Can I repay early, and will I save interest if I do?
Ask for the answers in writing, and ask the lender to explain anything you do not understand. A responsible lender will take the time to do so.
Before you sign
- Read the whole agreement, including the small print
- Compare offers from more than one lender
- Never sign a blank or incomplete form
- Keep a copy of everything you sign
- Do not let anyone pressure you into deciding on the spot
Be careful with informal lenders
Quick cash from an unlicensed lender can seem easy, but the cost is often very high and you may have little protection if there is a dispute. Borrow from regulated institutions wherever you can.
Guaranteeing a loan for someone else
If a friend or relative asks you to be a guarantor, remember that you may have to repay the loan if they cannot. Only agree if you understand the agreement and could afford to cover the debt yourself.
If you are struggling to repay
Contact your lender as soon as you see difficulty ahead, not after you have missed payments. Banks can often discuss options, such as changing the repayment schedule. Acting early usually gives you more choices and helps protect your credit record.