People borrow money because they wish to spend more money than they have at the moment. They do not want to put off their spending until the future when prices may have risen. Instead, they want to purchase their need or want now. Most people in Australia will have to borrow money to purchase major items. When you borrow money you are in debt. Being in debt is not a problem as long as you remain in control of the debt; that is, you are able to make the repayments. There is a price attached to borrowing. The money that is borrowed is called the loan principal. Not only will you have to repay the principal amount but also the interest. When you borrow money, the main cost you need to pay is the interest charged by the lending institution (typically a bank). The interest charged on the loan principal will depend on the interest rate per annum, the duration of the loan, and the amount of the loan repaid each month. Different loans have different interest rates. Interest rates can be either fixed or variable. A fixed interest rate means the rate does not change for the duration of the loan. A variable rate,
on the other hand, means that the lender can change the interest rate at any time during the loan.
There are four important steps to take when you are deciding whether to borrow money.
1. Understand that you will be getting yourself into debt. You will need to pay the principal plus the interest charges. Find out what type of security, if any, is required.
2. Find out how much the loan is in total. The loan is made up of:
• the principal
• the interest charge
• any additional costs, such as fees, stamp duty and government charges.
•Find out the annual percentage rate of interest and whether it is a fixed or variable interest rate.
3. Work out your repayment amounts:
• how much per repayment
• how many repayments in total
• when each repayment is due.
•Find out whether you can repay the loan over a shorter period. If you can, watch out for penalty
rates. Can you afford the repayments?
4. Understand what the consequences will be if you can’t make the repayments
