Check personal loan fine print

As interest rates hit record lows, personal loans are in hot demand.

As with all financial products, it is vital to do your homework to avoid falling prey to charges that lurk under the radar, despite lender assurances of there being no hidden fees.

Savings hub Mozo's director, Kirsty Lamont, said people who didn't take the time to read the fine print might find themselves "slugged with a sneaky fee or two".

For example, application fees can reach $600, Ms Lamont said.

"To avoid this extra cost, look for personal loans with zero application fee, or apply for a loan with a competitive enough rate to outweigh the cost of an expensive upfront fee," she said.

Ms Lamont said ongoing fees were another pitfall, with monthly service fees of up to $13.

Need some cash? Be careful when taking out a personal loan.
Need some cash? Be careful when taking out a personal loan.

"And if you think that's not a lot, think again," she said.

"Over a five-year loan period, that's $780 you'd lose."

Always pay promptly. "The typical late payment fee is around $20, but some personal loans slug you as much as $50 if you're tardy," Ms Lamont said.

Exit fees on variable rate loans were banned in 2011 but could still apply to fixed rate loans, she said.

And watch out for break fees. "While you might think paying your loan off early is a good idea, be mindful that this could see you hit," Ms Lamont said.

Ethical financing company Bromleigh Capital's founder, Olivia Molesworth, said the financial services sector was "fraught with danger".

Predatory lenders exploited desperation, she said.

The interest rate just tells half the story. Lenders profit from charges slipped into the arrangement that can increase the effective interest rate from 10 per cent to 25 per cent.

"It is so important to make sure there are no or low associated fees," Ms Molesworth said.

"What catches so many people is an underlying loan service fee.

"This could be hundreds of dollars across one-to-two years, which completely eradicates any savings on a low interest rate."

The worst fees relate to late payment, so always ask for an effective interest rate and fee schedule.

Ms Molesworth said people should monitor repayment fees and ensure their account had the funds to handle direct debits.

"We see people getting stung by this trap all the time," she said.

Ms Molesworth said just 21 per cent of lenders' loan calculators exposed loan establishment fees. Fewer still include direct debt fees and servicing fees. The calculators are designed to spruik a seemingly low rate without disclosing added fees, she said.

Consumers can study comparison websites such as Mozo, Finder and InfoChoice for insight into lenders.

"Often the predatory ones are called out," Ms Molesworth said.

"Do your homework before getting tied in - just be as cautious as possible about offering security. You never know what can happen, and there is no greater risk than putting your house on the line."

 

BORROW WISELY

• Compare multiple lenders.

• Study negative reviews.

• Avoid high-pressure phone calls.

• Use email as it gives you time to think.

• Beware red-tape clauses demanding power of attorney.

• Never let brokers push you around.



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