Loans

There are different types of loans to cover different situations.

Guarantor

A guarantor is a person who provides a “guarantee” to a bank or financial institution that you will pay them back. The most common scenario is where someone’s parent agrees to be a guarantor for a car loan for their child. Sometimes without their parents’ assistance such a loan may not be approved under the lending guidelines due to age, earning capacity or the credit history of the person wanting to borrow the money.

If the person fails to pay the loan, the bank will pursue the guarantor for the outstanding amount plus any interest.

It is rarely a good idea to be a guarantor for anyone.

Mortgages

A mortgage is a loan to purchase property such as a house. The bank or financial institution that lends you the money will register the mortgage over the Certificate of Title to the property.

This means that you are the legal owner of the property, however, if you don’t pay the loan the bank may take possession of the property. It also means that if you sell the property the bank must be paid the remainder of the money owing to them under the mortgage, from the sale price. If you are trying to sell the property for less than the mortgage amount, the bank may not allow you to sell it.

The bank will charge a rate of interest over the mortgage amount. This rate can be fixed or variable. A fixed interest rate means you have a set repayment amount over a specific period of time. A variable interest rate means that the repayment amount may vary depending on the interest rate that month.

If you are considering applying for a mortgage to purchase property you should:

  • find out whether the interest rate is fixed or variable and know what the consequences of any rate changes are;
  • check that you know all the fees and charges that you may have to pay;
  • find out who is actually lending you the money;
  • read everything properly and make sure you understand what happens if you do not or cannot pay;
  • do not sign any contract unless you understand all the terms and conditions; and
  • do not borrow more than what your budget will allow you to.

The bank will charge a rate of interest over the mortgage amount. This rate can be fixed or variable. A fixed interest rate means you have a set repayment amount over a specific period of time. A variable interest rate means that the repayment amount may change, depending on the interest rate that month.

It is always a good idea to seek financial advice from an accountant or financial planner when you are buying property.

 

Personal Loans

A personal loan or a line of credit is often given for things such as holidays, to buy a car or to buy whitegoods. A personal loan should not be used to fund everyday expenses like groceries.

A personal loan can be “secured” or “unsecured”.

A secured personal loan is where the lender provides you with a sum of money and takes a form of security in return. This means that if you do not repay the loan they can take possession of the item over which they took the security. For example, if a personal loan is secured over your car, and you don’t pay your repayments, then the lender can repossess your car and sell it.

An unsecured personal loan is where the lender does not have a security over an item of property that you own. If you do not repay the loan, you will be personally liable and may be pursued for repayment of the loan through the courts. The court can make an order that bailiffs can take your possessions to the value of the debt.

When you take a personal loan you should make sure that you read the contract fully so that you understand the terms and conditions. Some personal loans have a fixed repayment amount over a set period of time. Other personal loans can have a variable rate, which means that the repayment amount may vary dependent on the interest rate that month.

Think carefully about taking a loan for somebody else. If they fail to repay it, the law says it is your debt and you have to pay it.

Never borrow more than your budget will allow and always make sure that you store important documents related to the loan in a safe place. Always remember you should never sign something you do not understand.

Here is some more information about Entering into a Contract from the Australian Competition & Consumer Commission.

Rent To Buy

Rent to buy is where you pay a monthly amount for an item such as a fridge, for a set period of time. At the end of that time you will have the option to pay a final amount to own the fridge outright.

Before entering into a rent to buy agreement, make sure you fully understand how much you will be paying for the item in total and what the conditions of the rental agreement are. You often pay far more for the item than you would if you bought it outright straight away.

You can find out more about Interest Free Offers on the Australian Competition & Consumer Commission website.

Differences between states

ACT

Mortgages

The Office of Regulatory Services in the ACT have put together a booklet you can find online called Reality Check – a real estate guide for buyers and sellers – chapters 2 and 3 have some great information about choosing the right loan for your mortgage.

Personal Loans

If you have questions about a personal loan, you can contact the Consumer Law Centre ACT.