People borrow money for many reasons, from purchasing a home to starting a business. These items are usually too expensive for people to pay for on their own in a reasonable amount of time. Lenders can step in to provide the needed funds immediately and allow borrowers to pay the money back over an extended period.
Before you rush off to speak to a mortgage broker , however, you must make sure you genuinely need a loan. Talk with your financial advisor about how the loan will affect your cash flow and your long-term goals.
The first step toward borrowing is to find out if you qualify for a loan. Lenders will want to see the following:
- Proof of stable income
- Acceptable credit history
- Adequate savings
- Collateral (for most loans; see more about collateral below)
Perhaps most important of all, you must understand the basics of borrowing. When you know the fundamentals, you can ask relevant questions and determine the best loan for you. Let’s review the basics.
Interest Rate
The interest rate is the lender’s charge for allowing you to use their money. It’s usually a small percentage of the total amount lent. As you research interest rates, you’ll find two common types: fixed and variable.
Fixed Interest Rates
With a fixed-interest loan, the percentage remains steady for the life of the loan, regardless of changing market conditions. If you lock in a 6% interest rate, you’ll always pay 6% for the fixed term
Having a fixed interest rate helps with planning and budgeting. You’ll always know what to expect, and you’ll be protected from rising interest rates. On the flip side, if interest rates drop substantially, you’re still stuck with your original locked-in rate. In this case, some people refinance their loans to take advantage of new, lower rates.
Variable Interest Rates
Variable rates change from time to time. Your payment amounts will rise and fall in conjunction with the cash rate set by the Reserve Bank of Australia (the RBA). On the first Tuesday of each month, the RBA officially meets to discuss various economic indicators. Once they finish their discussion, they decide whether or not to move Australia’s cash rate. If the cash rate changes, lenders and banks change their interest rates, and your loan repayment amount will increase or decrease.
In recent times, banks have been slower to pass on changes made to the bank rate. Nonetheless, you still may see your repayment amounts rising and falling occasionally. If the underlying interest rate falls and you continue to pay the same amount each month, you’ll pay off the capital more quickly.
The Security Component
When you borrow money, your loan will be either secured or unsecured. These terms refer to whether you put up assets as collateral to guarantee the loan.
Secured Loan
With a secured loan, you guarantee that the lender will be repaid one way or another, either through steady repayments or by giving them claim on something you own. If you neglect to repay the loan, the lender takes possession of your collateral to recoup the money they’ve lost. The safeguard inherent in secured loans makes it possible for lenders to offer lower interest rates.
Unsecured Loan
Unsecured loans do not require collateral from the buyers. Because the lender has no protection if the loan goes unpaid, unsecured loans nearly always have higher interest rates than secured loans.
In the absence of collateral, some lenders require borrowers to have a co-signer added to the loan. The addition of another person on loan gives the lender added security. If the primary borrower can’t afford to make repayments, the co-signer will assume responsibility.
The Term
A loan’s term is the length of time scheduled for repaying the principal and interest. Conditions vary widely according to the type of loan. Personal loans generally stretch between one and five years. Mortgage terms may last up to 30 years. Terms for car loans are usually five years or less.
If you think you might want to pay off a loan early, make sure you sign a mortgage that allows for early repayment. By increasing your payment amounts, you can save money on interest over the life of the loan and shorten the repayment term.
Borrowing Advisem*nt
Before dashing off your signature on a loan, consider the many ways borrowing will affect your finances. In many ways, financing can help you to achieve your goals much faster. If you can buy more inventory for your business, you will be able to grow more quickly.
On the other hand, you will increase your debt-to-income ratio, which will hamper your borrowing power in the future. You may also have to pass on some opportunities because you won’t have as much cash at your disposal.
Talking over these possibilities with a financial adviser will help you to sort out the pros and cons. You can also improve the borrowing process by working with a broker who has access to many different lenders. With more options, you’re more likely to find a loan that better suits your circ*mstances.
Get in touch with us at Altus to consult about your unique situation. We can help you to go over your cash flow, tax situation and other factors that play into your decision-making process. We can also help you to find a foolproof loan that will help you to achieve your goals.
