Five golden rules when it comes to getting a personal loan

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Borrowing for a high-risk investment like cryptocurrency should align with your tolerance for risk and your ability to pay down debt if the market falls.

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Borrowing for a high-risk investment like cryptocurrency should align with your tolerance for risk and your ability to pay down debt if the market falls.

Katrina Shanks is the CEO of Financial Advice New Zealand.

OPINION: Most of us have had personal loans, whether auto loans, mortgages, or renovation loans, to name just a few, throughout our lives.

Most likely, these loans were a combination of enjoyable and compulsory purchases.

There are three types of debt: good, acceptable, and bad. Let’s take a look at each of these.

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Investment debt is good because it is meant to help you build your wealth for a secure future.

However, investment debt must be carefully considered. For example, borrowing for a high-risk investment like cryptocurrency needs to align with your tolerance for risk and your ability to pay down debt if the market falls, as we’ve seen in recent months.

Katrina Shanks says that the most dangerous debt is what is commonly known as <a class=payday loans.” style=”width:100%;display:inline-block”/>

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Katrina Shanks says that the most dangerous debt is what is commonly known as payday loans.

Mortgages are acceptable debt because they have a purpose and are generally for something that is likely to pay off over time.

Personal loans are generally bad debts, although there are exceptions.

These exceptions include when you borrow to do something like consolidate your loans or credit card debt into one loan, which often has a lower interest rate. Or even to buy a vehicle to help you get to your place of work, providing you with a stream of income.

Until Covid-19 hit, personal loans were relatively easy to get. Simply prove your ability to repay the loan by showing your payslip and you’re done.

But that has now changed, as rising interest rates and lower risk tolerance on the part of major lenders have combined with a general lack of basic financial education and good financial behavior on the part of many to make them a bigger problem.

One of the most common debts are mortgages. About 1.1 million people have them, worth a total of $34 billion.

The most dangerous debt is what is commonly known as payday loans.

These are really expensive short-term loans that you have to pay back in a certain amount of time. If you don’t, the high interest rate increases significantly to the point where you could end up paying four or five times the original amount.

I have seen some with an interest rate of 0.8% per day, and when administration fees are added, it can result in a really expensive loan. At that rate, it’s the highest cost of a loan you can afford.

For example, two weeks’ total repayment of $500 can quickly turn into $541 or $1,091 for a $1,000 loan. Often on top of that, there will also be a set-up fee of up to $300. And there’s more cost if you don’t repay your loan. If you do, that can add $30 a week to the total.

Because you’re borrowing money you can’t afford to spend, you immediately find yourself at a disadvantage.

If you can get it back in a couple of weeks, that’s fine, but sometimes getting on the treadmill is easier than getting off it, and once you’re on it, it’s tempting to stay there and get more.

Some golden rules:

  • Ideally, borrow only if you know you can pay it back on time.
  • Have a financial plan, so you know big expenses are coming your way, whether it’s a replacement washing machine or a new car.
  • Try to save for what you need and want instead of borrowing.
  • Have an emergency fund for when something unexpected goes wrong, so you don’t have to borrow funds and go into debt.
  • Keep in mind that your loan application may show up on your credit report, which means other lenders will see that you need funds.
  • Apply for a payday loan only if you have no other options; use it as a last resort. There are alternatives, and you should consider them before applying for one. These include Work and Income (if you have a benefit), The Good Shepherd and the Salvation Army (provided you have a limited income), and BNZ (special rates for students, trainees and recent graduates).
Have an emergency fund for when something unexpected goes wrong, so you don't have to borrow funds and go into debt.

SUNGMI KIM/Things

Have an emergency fund for when something unexpected goes wrong, so you don’t have to borrow funds and go into debt.

I’ve had personal loans in my life: I had a mortgage and line of credit for a larger purchase when I was younger and on a budget, but needed to buy things like a bed, a lawn mower, and a TV.

My rule was to borrow only for the necessities and save for the good.

As my financial advisor would say, a personal loan should be a last resort, and it’s much better to save for something than to borrow.

There is no risk if you have to wait a couple of weeks or months to get the money you need.

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