Borrowing basics

The golden rules of borrowing

Using credit can help you do many things: buy your dream house, get a new car or pay for essential household items. But fees, charges and interest rates can make borrowing money very expensive, especially if you borrow more than you can afford.

Here are a few things to think about before you get a loan.

Work out if you can afford to borrow

If you're thinking about borrowing money, ask yourself the following questions.

Can I afford the repayments?

Work out your current spending and how much you can afford to repay each pay period. Give yourself a buffer by allowing for interest rate rises and unexpected expenses. Then try living on less for a few months to see if you can manage the repayments. 

Work out if you can afford a loan.

Budget planner


Case study: Diane gives herself room to move

Young woman looking at her budget on a laptopDiane took out a home loan 3 years ago, but her repayments have gone up due to a few interest rate rises. She budgeted for these interest rate rises when she took out her loan, but things are still tight.

Now that she has bigger repayments, Diane decided to use the MoneySmart budget planner to work out how much she was spending on her mortgage, food, transport and petrol. The budget planner helped her see where she could cut back on her spending.

Diane feels better now that she has fine-tuned her budget and knows exactly how much money she has for her living costs.

Why am I borrowing money?

If you're borrowing money to help someone else, see loans involving family and friends before you go ahead.

Or if you need credit to pay electricity or other bills, see trouble with debt for options other than borrowing.

Is borrowing my best option?

There may be other ways to get what you want without going into debt. For example, you can save and buy the item outright, or put it on lay-by and gradually pay it off.

If you are on a low income, you may qualify for a no or low-interest loan.

Is now the right time to borrow?

Think about any changes that might affect your income. How secure is your job? Are you planning to start a family or take time off for study? Do you have any health issues that may mean you'll earn less for a while? If you said 'yes' to any of these questions, you might be better off saving now and borrowing later.

Know what you're signing up for 

Before you take out a loan, check the terms and conditions of any loan contract, including penalties for missed repayments or for paying off a loan early.

See credit contract for more tips on what to look out for.

Check your credit health 

Have you got a free copy of your credit report? Credit providers use your credit score and report to assess your capacity to repay a new loan, credit card, or mobile phone plan, or if you ask to increase your limit on an existing credit card.

A poor credit report could affect any loans or credit you apply for in the future, so it is important to make sure the information is correct.

Credit repair companies

'Credit fix', 'credit wash' or 'credit repair' companies may offer to fix your credit history but, in many cases, they may not be able to do what they say they can. You could end up paying a lot of money without being any better off.

See credit repair for things you should be aware of when dealing with a credit repair agency, and how to save money by doing your own credit repair. 

Make sure your credit provider is licensed

Credit providers and brokers that are not licensed are operating illegally in Australia. Make sure you only deal with a company or person who is licensed.

Search ASIC Connect's Professional Registers to check your credit provider has been licensed or you can phone ASIC's Infoline on 1300 300 630.

Warning about loan scams

Be suspicious if you are contacted out of the blue by a company offering loans with low interest rates, as they could be operating a loan scam.

Also be cautious if you come across a website offering loan applications online as you will need to check they are legitimate before you apply for a loan.

See our tips on how to pick a loan scam.

Getting into debt is easier than getting out of it, so before you get a loan or use credit, see if you have other options. If you do decide to borrow, make sure there's room in your budget for the repayments. 

Related links

Last updated: 27 Nov 2018