Personal loans Risks of borrowing

Risks of borrowing

Finance can be 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.

What are the key risks of borrowing?

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

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 + Establishment Fee

For example, if Monica gets a Harmoney loan of $12,500 with an interest rate of 9.99% p.a. her costs on top of the principal for Year 1 will be:

  • Interest ($12,500 x 9.99%) + Establishment Fee ($150) = $1,748.75 + $150

The Establishment 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 debts, 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.
  • Non-bank personal loans – A personal loan through a company such as Harmoney offers a better experience, using our automated, 100% online process. It's fast, fair and there's no need for awkward face-to-face meetings.

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 triggering collections processes. Defaults remain on your credit file for several years and have a negative impact on your credit rating, which makes it more difficult to access other loans and financial products 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.