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The questions you should ask before taking on debt

1.  Can I afford the repayments and how quickly can I pay the loan back?

2.  What are the fees and interest costs I might have to pay?

3.  Is it a secured or unsecured loan?

4.  What's in the fine print?

5.  What's involved with being a guarantor?

1.  Can I afford the repayments and how quickly can I pay the loan back? - top

To understand the full cost of your debt, click here for Westpac's personal loan calculator.

This calculator will reveal what your fortnightly/monthly payments will be over a fixed period of time.

You'll be surprised by how much your loan increases when interest is taken into consideration.

Click here for Westpac's budget calculator - find out how to incorporate the loan repayments into your expenses.

2. What are the fees I might have to pay? - top

Most credit or loan products have a range of fees that you may have to pay. It's important to read a summary of the total cost of your credit or loan, including fees and interest rates, so you know what you're signing up for.

Credit cards
Most credit cards will have an annual fee and some will have additional fees for optional loyalty programmes. There are also general fees charged if you fail to make the minimum repayment each month, or if you spend over your approved credit limit, plus interest charged on your outstanding balance.

Personal Loans
Personal Loans often have establishment or documentation fees that you are charged for setting up the loan. Some lenders may charge if you want to make a variation to your payment terms (eg if you want to pay off the loan early). There are also general fees if you miss a repayment.  Interest will be charged on the principal outstanding on your loan.

Hire Purchase
Hire Purchase agreements can have a range of fees; from establishment and annual fees, to missed payment fees. Interest may be charged immediately or there may be an interest-free period offered. You must read the term of your contract.

3. Is it a secured or unsecured loan? -  top

Secured lending means the debt you owe is 'secured' by an asset (i.e. car, house) you own or you've bought. Put simply, if you can't make repayments, the lender can sell the asset to recover their money.

For example, if you buy a car and can't afford the repayments, the bank or finance company who lent you the purchase money can repossess your car and sell it to cover your debt.

Often secured lending has lower interest rates - after all, the lender can use your asset as security, and the risk is therefore reduced.

Unsecured lending means the debt is not tied to any assets you own, i.e. credit cards, unsecured personal loans (those not tied to a car) and overdrafts.

Unsecured lending often has higher interest rates as without an asset to repossess; the lender's risk is higher.

4.  What's in the fine print? - top

You need to know what you're signing up for - make sure you read the contract, including any fine print.

Find out how much you're obligated to pay:
Read the statement of what you're required to repay, including principal, set up costs, administration fees, insurance (if any) and interest charges over the term of your debt.

Interest-free repayments:
Double check the terms and conditions - you may find that if you don't pay back the debt within the interest-free period, you end up paying interest from day one.

TIP: Find out what the interest rate will be after any interest-free period ends.

General repayments:
Are you allowed to make lump repayments on your loan? Can you increase the repayments? Are there costs for repaying early?

Find out if repayment insurance premiums are required on the amount of your debt. This will be added to your repayments and can significantly increase the cost of your loan.

Advantages and Disadvantages of Store Cards:

The advantages include:

  • Store cards can work like credit cards and offer instant credit 
  • You can use them to go to store sales even if you're short of cash 
  • Special discount events and store cardholder competitions

The disadvantages include: 

  • Store cards can have high interest rates if you don't pay your balance off in full before the payment due date 
  • You may be inclined to buy from one shop/store, rather than shopping around to get the best price

5.  What's involved with being a guarantor? - top

If you're considering guaranteeing someone else's loan, remember that in most cases, depending on the contract, you will be responsible for any repayments that the borrower cannot make, including interest and fees.

If you can't make the repayments yourself as guarantor, your credit rating may be affected.

Watch the video

Click here
to watch Rae, Marina and Nicci discuss ways to use debt to your advantage.

Talking Money Sense: How to manage your debt

Marina and Nicci share their stories
There's good debt and questionable debt - and Marina and Nicci have experienced both. Click here to read their stories.

Rae's guide to managing debt
Click here for Rae's guide to using debt to manage your budget and lifestyle.

Get yourself out of the red!
Check out our top tips for getting back in the black. Could debt consolidation work for you?

The products to help you manage your debt
Find out what products are available to help you manage your debt, from hire purchase to credit cards.

How can Westpac help?

The content of Talking Money Sense is general in nature, is designed for information purposes only and is not intended to constitute financial or other advice. Information is subject to change. Westpac New Zealand Ltd.