Borrowing Money – When and how to do it right

In general it is advised to avoid getting into debt, however there are certain times and circumstances when borrowing money is justified and sometimes even the right thing to do.  The key is knowing when and how to borrow money the right way.

If you are considering borrowing money, ask yourself these important questions:

  1. Do you really need to spend the money?
    It might be that you could put off making the purchase or not make it at all. If you are prone to impulse purchases, give yourself a two day “cooling off” period before going ahead with the purchase.
  2. Do you have other ways of financing the purchase?
    For example if you don’t need the item right away you could consider saving up for it, which will cost you far less in the long run once you factor in interest charges on the borrowed money.
  3. Can you afford to pay back the money you’re planning to borrow?
    Before entering into a loan, do your homework to be fully aware of interest rates and any other charges associated with the loan. Use a loan calculator to determine the repayments and make sure the loan repayments fit comfortably within your budget.
  4. Is now the right time to borrow?
    Think about any changes that might affect your income. How secure is your job? Are you planning to start a family or take time off for study? Do you have any health issues that may mean you’ll earn less for a while? If you said ‘yes’ to any of these questions, you might be better off saving now and borrowing later.

Good debt vs bad debt

There are ways to borrow that can be beneficial and others that you really should try to avoid. Using some kind of loan to buy consumer goods or depreciating assets – like a new car or home appliance – is always going to be a financial setback. You’ll be out of pocket for the cost of what you’re buying, plus the cost of borrowing. There are so many ways to borrow now – credit cards, after-pay, interest-free finance – it’s very hard to resist the temptation to buy now and worry about all the fees and interest payments later.

If you’re smart with savings and planning your finances, you can get to a point where you can afford things and still live within your means. Let’s say you invest the money you’d spend on repayments on a car loan. Over time, the earnings from that investment – and potentially its value – will accumulate to the point where you’ll have extra money to spend on the car, holiday, school fees or whatever will bring better quality of life to you and your family.

Choosing the right type of credit

You should also make sure you choose the right type of credit or loan for your situation; otherwise, you could end up paying more than you need to.

Key points to consider when comparing borrowing options:

  • the interest rate
  • how much you will repay in total
  • any penalties for missed or late payments, and
  • the cost per week or month and whether this might vary.

Make sure your credit provider is licensed

Credit providers and brokers that are not licensed are operating illegally in Australia. Make sure you only deal with a company or person who is licensed.

Search ASIC Connect’s Professional Registers to check your credit provider has been licensed or you can phone ASIC’s Infoline on 1300 300 630.

Need help? Contact us at Hunter Lending Solutions to arrange a confidential chat.