Personal loans

Getting a loan can be expensive, but if you know your options and shop around you will spend less. Choosing the wrong lender could cost you hundreds or even thousands of dollars more than a cheaper product.

• Know your options
• Find the best interest rate
• Check the fees and charges
• Follow our 8 rules of personal loans

Know your options

There are many different lenders to borrow from. They include your own family and friends, employers, banks, credit unions, finance companies, and lenders of last resort such as loan sharks.

The cheapest loans often come from friends, family, or employers. The next best thing is to approach your bank or a credit union for a personal loan.

Banks, building societies, and credit union interest rates are often lower than those offered by other lenders and they often charge fewer fees.

You can also borrow money on credit cards, but the interest rates are usually higher than for personal loans. It's also easier to let the repayments get out of hand if you only pay back the minimum balance each month.

You may want to buy something in a hurry and it can be very tempting to use the shop's own credit contract (hire purchase), store card, or the “line of credit” cards, offered by finance companies. Interest rates on these loans can be high and there are often large establishment fees and insurance to pay. And some of them allow the finance company to repossess everything you ever bought with the card if you get behind on your payments.

If you're in urgent need of cash you might go to a local loan shop. Beware that their interest rates can be very high. Loan shop staff will often talk of repayment as so many dollars a week, rather than focusing on the total you will pay back over time. Always make sure you add up the total cost.

Lenders of last resort that charge very high interest rates should be avoided at all costs – especially if they're offering money door-to-door and don't have an office. These lenders can include “loan sharks” who use heavy methods to make you pay up. They often charge interest by the week on "payday" or other loans and you can easily end up paying many times the original amount of money you borrowed. It's not unusual for interest rates on payday loans to be several hundred percent each year. Some of these companies use heavy-handed techniques to get their money back - find out more on the Ministry of Consumer Affairs website.

If you need money quickly it's best to contact Work and Income to see if you qualify for a hardship grant or speak with your local Budget Advice Service. They may know of church or benevolent funds in your area you can borrow from.

Find the best interest rate

Interest on personal loans makes them an expensive way to get money. Shopping around usually means you will pay a little less. It's easy to check interest rates online.

If you own property you can usually get a cheaper loan secured against your home from a bank or other lender. But be aware that if you fall behind with payments you risk your home being repossessed.

Likewise a revolving credit home loan allows you to borrow money against your house any time you want. Only do this if you're the sort of person who is disciplined about making repayments.

If you do borrow against your home, try to pay the additional loan off over a shorter period of time. Even if the interest rate is lower, you'll pay more in the long run if your loan is spread over 25 years.

Check the fees and charges

One of the real tricks to finding the best loan is to familiarise yourself with the fees and use a calculator such as the Get into debt calculator to see what you'll pay in total.

Many loans have establishment or documentation fees, which can be more than $100. Some such as store cards will charge you for replacement or additional cards, or to reprint a statement. You'll also pay a fee in many cases for a variation of repayment terms and if you fail to pay on time you'll be charged default fees. If those fees are all rolled into the loan, you'll pay interest on them, which is a real sting in the tail.

Banks can charge honour and dishonour fees if your loan repayment exceeds the agreed overdraft on your current account.

8 rules of personal loans

1. Always ask yourself if you really need to borrow the money. Could you cut something from your spending and save instead?
2. Use the Get into debt calculator to work out what the loan will cost you each month and in total before signing on the dotted line.
3. Make sure you understand all the fees that may be charged so you don't get a surprise.
4. Know the risks of borrowing from lenders who take security in all your personal property. If you get behind in payments they could claim the right to take all your household goods.
5. Be aware of when your payments are due and make sure you have the money to cover them.
6. Get free debt counselling from your local Budget Advice Service if you're borrowing money for household basics.
7. Try not to borrow more to re-finance a debt. Talk to your lender instead about ways of reducing the interest on your existing loans.
8. Avoid going guarantor on other people's loans. If they don’t pay, you will have to.