Navigating the loan maze

loan 150x150 Navigating the loan mazeWhen 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 usually quite high so borrow only for the short-term.

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

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 standard variable rate 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 structure, the borrower pays the interest expense while the loan is held and doesn’t repay the amount borrowed until the end of the term.

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

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 rate – 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 professional financial adviser can help you navigate your choices, so give us a call on (07) 3040 4840.  If you need a loan for whatever need, we can always point you in the right direction.


Disclaimer:

The advice on this site may not be suitable to you because it contains general information that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information.  Please also refer to our general advice warning under contact us tab on our website.  The article is based on information available at the time of writing only and therefore care should be taken as to the accuracy of the content.

Image courtesy of [Stuart Milest] at FreeDigitalPhotos.net

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