Personal Loans Smart Guide

1. Finding a lender

What you'll learn in this step: shop around for the best debt deal.

There’ll come a time in your life when you’re faced with deciding whether to borrow money. You may be a student needing some funds to complete your degree or perhaps you’re considering buying a car or a home.

In our step-by-step guide to debt management, you’ll learn that debt isn’t necessarily a bad thing – as long as you stay in control of your borrowings.

Having made the decision to borrow, where do you go – the bank you’ve been with for a few years, a local credit union, a finance house such as GE Money, a mortgage broker, or even that quick-approval lender advertising on late-night TV? These days the list of lenders seems endless.

The purpose of your borrowing will be one factor in determining where you turn, as will how long it’ll take to pay back the money – your credit card might be the no-fuss way to buy something you can afford to pay off in a month or two, especially if you have a card with a low interest rate.

The key is to shop around – interest rates and loan fees can vary widely, so sniff out the best deal. But make sure you stick with reputable lenders, and check your loan contract carefully.

Read more about:

How to borrow cheaply, Debra Cleveland, November 13, 2004 - The Australian Financial Review “There is more than one way to borrow. And the alternatives are always worth considering.”

Managing your debt, Susan Hely, April 1, 2005 - Personal Investor “Borrowing money is how people get rich. But if you worry too much about interest rate rises, chances are you have borrowed too much.”

Non-conforming lenders

Apart from the mainstream lenders, an alternative source of funds is the “non-conforming lender”. These finance providers are more willing to lend to people who may not pass the credit tests imposed by others – but at a cost.

Non-conforming lenders usually charge a higher rate of interest because of the perceived higher risk in lending to someone who might not pass muster elsewhere. This penalty could amount to thousands of dollars over the life of a loan, so think carefully before going down this path.

This type of loan is used by people who have yet to establish a solid credit rating, by those who for various reasons don’t want to disclose the degree of financial detail required by other lenders, and by casual workers and small business people who don’t have the sort of steady income preferred by other lenders.

One or two years of on-time loan repayments under these arrangements can help establish a good credit record.

Read more about:

Report tips a low-doc loan boom, Peter Weekes, September 30, 2005 - The Age “Claims that the non-conforming mortgage market will almost double to $20.2 billion by 2009 have brought mixed responses from industry experts.”

Wealth warning: some loans are dangerous, Joyce Moullakis, March 2, 2006 - The Australian Financial Review “Questionable practices are rife among small fringe lenders and mortgage brokers, Victoria's Consumer Affairs Department claims.”

Brokers who have a lend of you, George Liondis, February 19, 2006 - The Sun Herald “Borrowers are less likely to get burnt if they know the types of commissions paid to brokers by banks and other lenders.”