Nav­i­gat­ing the bor­row­ing maze

The Weekly Advertiser Horsham - - News -

When choos­ing the right type of loan to suit your needs now and into the fu­ture, there are many fac­tors to con­sider.

What is the pur­pose of the loan?

Credit cards pro­vide im­me­di­ate ac­cess to credit that can be used for many pur­poses, but the in­ter­est rate is high so they are best re­lied on only for short-term loans.

If you need a larger loan to pay back over a longer pe­riod, con­sider a per­sonal loan. These tend to be used for pur­chases such as hol­i­days or cars.

As the name sug­gests, a home loan is used for prop­erty pur­chases, ei­ther for your own home or an in­vest­ment. They come in a va­ri­ety of forms, from the ‘no-frills’ prod­ucts with low in­ter­est rates through to loans of­fer­ing fea­tures such as off­set ac­counts or re­draw fa­cil­i­ties. Home loans can al­ter­na­tively be struc­tured as lines of credit that en­able a bor­rower to re­pay and re­draw the loan on an on­go­ing ba­sis.

If you are plan­ning to in­vest in shares and man­aged funds, then a mar­gin loan might be more ap­pro­pri­ate, or prod­ucts with built-in lending fa­cil­i­ties such as in­stal­ment war­rants.

Prin­ci­pal and in­ter­est or in­ter­est only?

A prin­ci­pal-and-in­ter­est loan in­volves a re­pay­ment com­pris­ing the monthly in­ter­est on the out­stand­ing bal­ance plus an amount that will re­duce the prin­ci­pal over the term of the loan.

Un­der an in­ter­est-only ar­range­ment, the bor­rower pays the in­ter­est ex­pense while the loan is held and doesn’t re­pay the amount bor­rowed un­til the end of the term. These loans are not gen­er­ally pro­vided for long terms. For in­stance, a home­buyer or in­vestor takes out a 25 or 30year mort­gage and re­pays only in­ter­est for the first five or 10 years, af­ter which the prop­erty is sold and the loan paid out in full, or it re­verts to a prin­ci­pal-and-in­ter­est loan for the re­main­der of the term.

If you’re bor­row­ing to in­vest, the in­ter­est charged on the loan is gen­er­ally tax-de­ductible. This means that choos­ing an ini­tial in­ter­est-only loan, rather than a prin­ci­pal-and-in­ter­est prod­uct, could be sim­pler for tax pur­poses and al­low you to max­imise your de­duc­tions over the term that you hold the in­vest­ment.

On the other hand, us­ing a line of credit fa­cil­ity to buy a de­pre­ci­at­ing as­set, such as a car, could mean that over time you end up ow­ing much more than the item is worth, and pay more in­ter­est than a tra­di­tional prin­ci­pal-and-in­ter­est loan.

Which loan is right for me?

In de­ter­min­ing the most suit­able loan, look closely at the fees, charges and the in­ter­est rates – these can add sig­nif­i­cantly to the cost of the loan.

Also, remember that you usu­ally pay for any ad­di­tional fea­tures at­tached to the loan. If you’re not sure, a fi­nan­cial ad­viser can help you nav­i­gate the many choices.

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