5 Personal Loan Red Flags And How To Avoid Them

When applying for a personal loan, look out for unreasonably high interest rates, fees and charges. Generally payday loans and ‘fast loans’ may come at a much higher cost, but their attractiveness stems from the idea of getting cash quickly. Also, as these loans may be considered higher-risk loans, this could impact your credit rating in a negative way, and other lenders may view this type of lending as higher-risk behaviour when assessing a loan application.

Be aware that accessing fast loans or pay-later services on a regular basis may lead to a cycle of bad debt.

When lenders don’t provide personalised interest rates, it means that everyone receives the same rate, regardless of their credit score and financial standing. Especially if you’re one to keep your finances in order and maintain excellent credit scores, receiving a rate that's not personalised to your situation could mean you end up with a higher interest rate than you could get elsewhere.

Doing your research and setting realistic expectations based on your own financial situation allows you to be more informed when deciding to apply for a loan.

Be well versed on any additional fees or charges that may apply by simply just managing your loan. This includes early repayment charges, ongoing servicing fees, extra repayment fees and monthly or annual fees. Sometimes these are buried in the terms and conditions and can be easily overlooked when you first apply.

This includes overdrafts, and extended lines of credit that have no specific repayment time. When borrowers are not able to pay back short term loans or fast money loans, lenders can renew loan terms with additional fees. Being on top of your repayments and doing your research upfront can save you from landing in a sticky situation. Shorter terms may be attractive on first appearance but can cost you more over time if you are not well informed.

All lenders in Australia are required to have an Australian Credit Licence and those lending to consumers, need to comply with ‘Responsible Lending’ in accordance with the National Consumer Credit Protection Act 2009 as well as ASIC’s Regulatory Guide 209. This means lenders are legally required to conduct a certain level of diligence about consumers applying for credit. At Wisr, responsible lending is extremely important to us.

At a high level, responsible lending obligations requires lenders to:

• Make reasonable inquiries about the consumer’s requirements and objectives in relation to the credit product;

• Make reasonable inquiries about the consumer’s financial situation; and

• Take reasonable steps to verify the consumer’s financial situation.

If you encounter a lender who doesn’t seem to be asking enough questions about your circumstances, you should be cautious about taking a loan with them. While it may seem easier to be asked less questions, you could end up paying a higher price and the loan may not be suitable to meet your requirements and objectives.

If you're considering taking out a loan in the near future, get yourself prepped and find out exactly what you need to know before applying.