The Basics of Borrowing Money

There are four golden rules to borrowing.

Borrow within your means

Work out how much money you'll have after paying for housing, groceries, bills, transport, clothing and other personal costs. How much of what's left can you realistically afford to spend on repayments?

Know what you're in for

Make sure you understand the contract. Know the total cost of the loan including any added fees and charges, and the number and amount of repayments. If you've given one of your assets as security for the loan, remember that by defaulting on the loan, you could lose the asset.

Shop around

Find the lender who will give you the best terms. Spend some time now shopping around and it could save you thousands of dollars down the track.

Pay the loan back fast

Repay your loans as soon as possible. Pay off the loan with the highest interest rate first. You will usually make a better return repaying debt than investing or saving the money elsewhere. But be sure to check with your lender for any early repayment penalties.

Picking the right loan - There are three basic types of loan: specific loans, revolving credit and mortgage associated loans.

Specific loans - You borrow a particular amount and agree to repay it in specified instalments over a certain term.

Revolving credit - You borrow money whenever you like up to a credit maximum, and make minimum repayments (normally once a month).

Mortgage loans - With most home loans, you can borrow against equity in your home for big-ticket items like home improvements, a new car or holiday. It's like an overdraft, but is secured against your house, so interest rates are lower.