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Loans: Everything You Need To Know Before You Apply

Are your bills to the roof?๐Ÿคฏ

Are you buying a new car or a new house? ๐Ÿคฉ

Perhaps you’re getting married?โ€”Wow! Congratulations!๐ŸŽ‰

Orโ€”knock on woodโ€”is there a medical emergency for which you need a hefty sum?๐Ÿ˜Ÿ

There are many perfectly valid reasons for taking out loans. In fact, it is estimated that 1 in 5 Australians will take out a loan within the next six months. Doing the math, the ratio equates to around 4.47 million Australians. Moreover, according to RBA estimates, Australia had approximately $145.5 billion worth of outstanding loans as of September 2020.

So before you fill out a loan application form, read through this loan guide, loaded with example-based information about the various loan types, comprehensive benefits and drawbacks, your fundamental rights as a borrower, and everything you need to know about loans in Australia.

Here’s what’s included in the guide:

What Is A Loan?

The word “loan” describes a credit instrument in which money is lent towards another person or party with the value or original amount repaid in the future. The lender will often top up the principal amount by adding interest and service charges, which is something the borrower should repay in addition to the principal amount. Loans may be made for a predetermined, one-time payment or as an open-ended credit line with a cap up to a certain amount.

Common Loan Attributes You Should Know

There are different types of loans. However, almost all loans have common attributes:

Principal: The initial loan amount or borrowed funds

Interest: It is a fee the lender imposes on the borrower as a fraction of the principal. The interest, together with the initial loan amount, must be repaid by the borrower.

Term: The loan term is the time it takes for the borrower to repay the initial principle plus interest entirely. Short-term loans have repayment terms of one year or less, whereas long-term loans are those with repayment terms of more than one year.

Payment Amount: It is the amount of money that the borrower has agreed to pay back each month. The principal and interest are both included in this payment. If a borrower decides to pay more than the required amount in a particular month, the additional funds will be used to reduce interest.

What Are The Different Types Of Loans?

Saving money is usually a smart move before making a significant purchase. However, in practice, that’s not always feasible. That is particularly true regarding costs associated with a university degree, a car or house, or even sudden emergencies like hospital bills. If you can’t save money upfrontโ€”apply for a loan. But since there are different loans for different purposes, you’ll need to know precisely what type to look for.

Here are the different types of loans that can help you with making life-related decisions:

1. Personal Loans

Personal loans are the most common type, with payback durations ranging from 24 to 84 months. The only things you can’t use for them are a college education or illegal acts. Personal loans are often used for the following purposes:

  • vacations
  • medical bills
  • home remodelling
  • consolidation of debt
  • wedding preparations
  • transferring to a new city 
  • buying expensive equipment such as computers.

2. Car Loans

Car loans are secured loans that can be used to buy a car and have payback durations ranging from 3 to 7 years. The car itself serves as the loan’s collateral. If you don’t make repayments, the lender will seize the vehicle. Banks, online lenders, credit unions, and even car dealers typically provide car loans. Some car dealers offer a finance division that may assist you in finding an appropriate loan from affiliated lenders. Others function as “buy-here-pay-here” lenders, directly providing you with a loan from the dealership. 

3. Student Loans

Student loans are intended to cover accommodation costs, tuition, and other school-related expenses at recognised institutions. This implies that, in general, you cannot borrow student loans to cover specific learning systems, such as coding boot camps or unstructured courses. Many students find student loans practical, considering that 28% of Australians โ€“ equivalent to over 5.4 million people โ€“ still have debt in student loans.

4. Mortgage Loans

Mortgages are loans that help you fund the purchase of a house or property. Depending on your needs, there are several varieties of mortgages to choose from. Typical mortgage lenders include banks and credit unions, but if a loan qualifies, they may sell it to a government-sponsored organisation.

5. Home Equity Loans

A home equity loan, commonly referred to as a second mortgage, can become available to you if your house has equity. The loan is secured by the equity you have in your homeโ€”the amount that belongs to you, not the bank. Typically, you can borrow a lump sum payment of up to 85% of the equity in your house, with the remainder being repaid over five to thirty years.

6. Payday Loans

A payday loan is a short-term loan that often lasts just until the following payday. You don’t need excellent credit to qualify for these loans since they are not credit-based. However, these loans usually have an exploitative nature for a few reasons. At first, it seems beneficial, but then you find that additional fees are added, trapping many individuals in debt commitments that may even be more than the amount they initially borrowed.

7. Small Business Loans

Small business loans come in various forms, including equipment, working capital, and term loans. These loans support the operational funding of small businesses, which are generally enterprises with up to 300 employees. Local companies, such as landscapers, hair salons, restaurants, family-run grocery stores, and sole proprietors, such as independent contractors who hold a regular day jobs, are also eligible to apply.

What Are The Different Types Of Loans According To Terms?

Loans come in many different forms. Several factors can differentiate the costs associated with them along with their contractual terms. Below are the different types of loans classified according to terms.

Secured Loans

Loans can be classified as either secured or unsecured. Secure loans are those backed by collateral, such as mortgages and car loans. In some situations, the asset used to secure the loan serves as the collateral. For example, a home’s mortgage uses the asset to ensure the mortgage, while a car loan uses the vehicle to secure the loan. If necessary, borrowers may be asked to provide other collateral for different types of secured loans.

Unsecured Loans

Examples of unsecured loans are signature loans and credit cards. Any kind of collateral does not secure them, so to speak. Due to the increased default risk compared to secured loans, unsecured loans often have a higher interest rate. The lender may seize the collateral if the borrower fails on a secured loan. On the other hand, an unsecured loan rate may change dramatically based on several variables, including the borrower’s credit score.

Revolving Loans

Loans may also be classified as term or revolving. You can use funds on your revolving loan, pay it back and then use it again. An example of a secured revolving loan is a home equity line of credit (HELOC), while a credit card is an unsecured revolving loan.

Term Loans

Term loans are repaid over a particular time in equal monthly payments. Examples of short-term term loans is a signature loan, while a car loan is classified as secured, long-term loan.

What Are Your Rights As A Borrower?

It pays to be aware of your rights as a borrower and don’t hesitate to exercise them.

But what are your legal rights? You can also count on your lender to uphold half of the contract since borrowers are given strong protections under the law. You have to 

1. You Have The Right To Be Informed Of What To Expect From Your Loan

The lender must provide you with a thorough contract that spells out your loan’s fine print. It would be best if you made it a point to understand all your responsibilities, costs, and expenses and confirm that the loan amount information is accurate.

2. You Have The Right To Be Aware Of Your Interest Rate

Your lender is obligated to notify you in advance of any changes to interest rates, either directly or by publishing an advertisement in a major publication.

If there are any changes to your interest rate, the lender must notify you in writing at least 20 days in advance.

3. You Have The Right To Get A Copy Of Your Loan Statement

Your lender must provide you with a loan statement at least every six months. You have the right to challenge any transactions that don’t seem appropriate or justified to you.

 4. You Have The Right To Pay Off Your Loan Whenever You Want

You are free to make full payment on your loan at any moment, albeit some expenses could be associated. In light of this, you also have the right to be informed of your payback amount. Your lender has to provide you with your payback amount in response to a written request within seven days.

5. You Have The Right To Cancel Your Agreement Before The Money Is Withdrawn

If the money has not yet been pulled down for settlement, you have the right to cancel the deal.

6. You Have The Right To Assistance At A Moment Of Financial Difficulty

If you get into financial problems, there are laws to safeguard you. To be prepared for the unexpected, it is essential to explore the appropriate solutions.

What Are Your Responsibilities As A Borrower?

However, you will recall from childhood that having more rights comes with more responsibilities. You also have specific responsibilities to your lender, including the following:

โœ”๏ธ When applying, be sure to provide accurate, truthful information.

โœ”๏ธ Make all required payments before the deadline.

โœ”๏ธ Maintain the property in excellent shape and refrain from making significant changes without your lender’s consent.

โœ”๏ธ Take out insurance covering the buildings’, structures’, or vehicles’ full replacement cost while maintaining the policy up to date.

โœ”๏ธ Without your lender’s approval, you may not sell, rent, or refinance any property.

What to Expect From Your Lender?

According to the National Consumer Credit Protection Act 2009, lenders and brokers may only provide credit to a consumer if the proposed loan satisfies their standards and goals, and the customer can make the repayments without experiencing significant hardship or selling their house.

Under the National Consumer Credit Protection Act of 2009, a lender must:

โœ”๏ธ Ask pertinent questions on a customer’s financial status.

โœ”๏ธ Analyse the customer’s financial condition reasonably.

โœ”๏ธ Make appropriate enquiries about the needs and goals of the customer.

Many lenders have neglected to set up precise procedures to assess a loan’s eligibility. If this happens, note that you may be entitled to compensation if your bank or mortgage broker gave you credit that you could not repay and, consequently, put you in a difficult financial situation.

What Are The Pros And Cons Of Taking Out A Loan?

A loan has advantages and disadvantages, just like any other thing in life. What is hugely beneficial to one individual could be detrimental to another. Therefore, making your own assessment and considering your possibilities before deciding is crucial.

The Pros of Taking Out A Loan

 Under some conditions, loans might be helpful because:

๐Ÿ‘ You May Make Use Of Loans To Consolidate Debt.

You can get a loan to settle all or a portion of your current obligations (including credit card bills, rent, or other loans). A single, more manageable monthly instalment can be preferable to many fees and repayments due at various intervals, significantly if you can acquire one with a lower interest rate than the one you’re now on.

๐Ÿ‘ Loans Can Be Flexible

You can use your loan for many different things, including debt consolidation, vacations and wedding preparations, and unforeseen costs like car repairs. If you want fast access to cash, you can easily apply for a loan, and some lenders can approve them immediately.

๐Ÿ‘ Interest Rates Could Be Lower Than Credit Card Rates

The interest rates on loans may be lower than those on specific credit cards. Furthermore, if you want a higher limit and are confident that you can make repayments, you could be able to qualify for a loan for a higher amount than a credit card. 

However, this is mainly dependent on the type of loan being offered. Remember that your credit score might affect your borrowing alternatives, including the amount of money a lender will allow you to borrow and the applicable interest rate.

The Cons Of Taking Out A Loan

Let’s explore some possible drawbacks to taking out a loan:

๐Ÿ‘Ž There May Be Significant Fees And Interest Rates

The overall cost of borrowing may be increased by service charges, interest rates, and potential penalties for loans. Additionally, borrowers with bad credit can wind up paying steeper interest rates. It could be better to pay your bills in this manner if you have funds available or wait until you can save some cash.

๐Ÿ‘Ž You Are Bound By A Contract

Loans bind you to a predetermined payment schedule. Furthermore, depending on the type of loan you apply for, some loans require you to make a balloon payment (often on car loans), or you may incur penalties for repaying off the loan sum before the maturity date. Before submitting your application, make sure to study all fees and penalties. Also, remember to take note of the comparative rate to understand the loan cost clearly.

๐Ÿ‘Ž Loans Add To Your Debt

Ask yourself honestly whether the benefit of getting a loan outweighs the potential long-term financial burden. Pay attention to your expenditures and avoid going into too much debt. When debt outpaces you, saving cash and making other payments on schedule might be difficult.

With A Loan, You Are Not Aloneโ€”We Provide Better Solutions For Your Financial Needs

Loans are Godsent, especially in times of need. However, remember that the loan will ultimately need to be repaid, regardless of the situation. When you take out a loan, whether to knock off credit cards or throw the ideal wedding, you are borrowing money that has to be returned, along with interest charged on the borrowed amount. Loans can be helpful, but you should always use them wisely.

At Askfunding, we make it simple for you. We are your friendly financial partnerโ€”a name you can put your trust in. Feel free to connect with us with whatever loan needs you have. We make your goals our goals, and we’ll go out of our way to get you the financing you need.