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How to Avoid Lending Red Flags

A loan is an important decision, so it’s a good idea to do your research and keep an eye out for red flags that might land you in a difficult financial situation. Here are some general red flags to look out for when borrowing.

🚩 High interest rates.

When applying for a 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 behaviours 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.

Alert

Financial institutions can charge very high fees and interest rates, especially on credit cards. Be aware of interest-free periods and offers that revert to high rates after a certain amount of time, often known as ‘honeymoon’ periods.

🚩 Non-personalised rates

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 not personalised to your situation could mean that you end up with a higher interest rate than you could get elsewhere.

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

🚩 Hidden fees and charges

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.

A quick tip here is when comparing interest rates, don’t just compare the ‘headline’ interest rate a lender advertises, but also pay attention to what the ‘comparison rate’ is, as the comparison rate also considers ongoing recurring fees that may be applicable on the loan.

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🚩 Shorter terms

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.

🚩 Low-doc or no-doc applications

All lenders in Australia are required to have an Australian Credit Licence and for 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.

Stay on the lookout

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.

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Disclaimer: This article contains general information only, and is not general advice or personal advice. Wisr Services does not recommend any product or service discussed in this article. You must get your own financial, taxation, or legal advice, and understand any risks before considering whether a product or service discussed in this article may be appropriate for you. We have taken reasonable efforts to ensure that the information is accurate at the time of publishing, but the information is subject to change. We may not update the article to reflect any change.

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