What are the key risks of being a borrower?

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Finance is often a roadblock in life. Whether you're buying a home or a car, starting a business or planning your dream wedding, taking out a loan means you'll have the money you need, when you need it most.

Borrowing money shouldn't be treated as a quick fix though, as paying it back may take years and you need to be sure you can keep up with your repayments while still managing your expenses. If you get into the habit of taking out loans you can't afford to pay back, this will only lead to serious problems in the future.

What are the key risks of being a borrower?

Finance is often a roadblock in life. Whether you're buying a home or a car, starting a business or planning your dream wedding, taking out a loan means you'll have the money you need, when you need it most.

Borrowing money shouldn't be treated as a quick fix though, as paying it back may take years and you need to be sure you can keep up with your repayments while still managing your expenses. If you get into the habit of taking out loans you can't afford to pay back, this will only lead to serious problems in the future.

Before you borrow money

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It's easy to get into debt, but much harder to get out of.   If you're thinking about taking out a loan, ask yourself:

How much will the loan cost?

The total amount you pay back will be greater than the loan amount (the principal), due to interest payments and other fees involved. 

To work out how much you'll be paying overall, you need to calculate:

  • Loan Amount + Total Interest + Platform Fee + Payment Protect (if you choose this option).

For example, if Monica gets a Harmoney loan of $12,500 with an interest rate of 9.99% p.a. and she doesn't choose Payment Protect, her costs on top of the principal for Year 1 will be:

  • Interest ($12,500 x 9.99%) + Platform Fee ($500) = $1,748.75

If you choose to add Payment Protect to your loan, a Payment Protect fee will be added to your loan amount. The fee is calculated as a percentage of your loan, and then your monthly repayments will be based on your loan amount plus the Payment Protect fee. 

The Platform Fee is a one-time payment that is paid upfront.  The interest paid over time will also be lower, as some of the principal has already been paid off.

Can you afford to pay it back?

You should only borrow money if you're sure you can pay it back. Make sure you understand what your repayments are and how often repayments are required to be made, so you don't miss any deadlines, read the terms and conditions of the loan to find out what fees are involved, and speak to a financial advisor if you need any help.

You should avoid the temptation to take out another loan to help you pay back an existing loan. However, if you already have multiple loans, a debt consolidation loan could make things easier by managing these under a single monthly payment.

What are your loan options?

You can borrow money from a number of sources, which each have their pros and cons. The most common are:

  • Friends and family – If people are willing to help you, these loans are usually the most affordable, but they can create tension.
  • Bank loans – A personal loan from your bank, building society or credit union may have lower interest and lower fees, but less flexibility.
  • Credit cards – The convenience of credit card payments comes at the cost of higher interest rates and expensive charges if you don't pay off your balance every month.
  • Peer-to-peer loans – P2P loans through the Harmoney marketplace offer a better experience, using our automated, 100% online process. Find out more about P2P lending.

What happens if you can't pay your loan?

If you miss payments on your loan, you risk defaults being listed on your credit file and Collections Processes. Defaults remain on your credit file for many years and have a negative impact on your credit rating, which makes it more difficult to take out other loans in the future.

If you're struggling to keep up with your payments due to a change in your circumstances, find out how Harmoney can help you with Unforeseen Hardship.