When you are facing problems balancing your income and expenses; you will likely face a deficit and have to find the money from somewhere to meet your commitments. During such difficult times, it can be very tempting to take out a loan and then worry about repayment later. This is a dangerous debt trap to fall into, which will lead you into a vicious cycle of debt.
How can you avoid getting caught in a debt trap and pick the right loan?
You do your homework about the potential money lender. Find out about their business practices and their ratings from The Australian Competition and Consumer Commission. This will show you how reliable the lender is and what you might have to watch out for. There are some genuine lenders and some fly-by-night operators who allow you to borrow fully aware that you might default, and since the loans are secured, they get their money back one way or the other; but you will end up losing your asset.
Loans to avoid and other options:
- Avoid taking any cash loans from the lender who wants an advance fee; this is not the norm, and should send up a red flag immediately. In some cases, they will take your money and simply vanish. Or they might lend you the money, but at exorbitant interest rates, which will lead to default and possible loss of assets if it’s a secure loan.
- Avoid loans from any financier who is eager to offer you the loan, against all odds. This too should be a clear indicator of ulterior motives, and even if you think that you are getting an unsecured loan, the fine print might contain some damaging clauses which you will pay for dearly later, when you lose your household goods or car or other assets.
- Another kind of loan to steer clear off, are payday loans; as the name indicates, you can just write a check and borrow an amount; the lender will hold your check until your payday when you have to repay the loan along with the fee. As it frequently happens, if you are unable to repay the entire amount, the lender allows you to roll over the loan, at higher fees. This kind of rolling over spirals and most payday loan borrower’s end up paying almost 3 – 4 times the original principal. So steer clear of such loans at all costs. If you are 100% confident in making the repayments this may be an option for emergencies.
- Pawning something at your local pawnshop might seem to be a stop-gap measure. But be warned that if for any reason at all, you are unable to repay the loan; you will forfeit the asset that you have pawned. Selling the asset will bring you more cash and you will not lose money by paying interest. So selling the item that you want to borrow against might be a better idea, in case you need urgent cash.
- You can approach the Australian Salvation Army via your local Community Centre. They will help you out with short term loans, food vouchers, coupons, even accommodation and furniture, etc. apart from offering free counseling to manage your finances better. There are other loan programs for people on Centrelink or welfare.
These loans mentioned here are in no way exhaustive, and you should check out all the options available to you and consider your repayment capacity and then make a decision. By doing your homework you can ensure that you get the best loans at the best rates. No matter how difficult the situation, a loan should be helpful not hurtful.