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Things you should know before you borrow money

Reading time: 7 minutes

Debt comes in many forms – credit cards, hire purchase, car loans, personal loans, mortgages, student loans. There's no shortage of people out there wanting to lend us money! Borrowing money can seem like a quick fix, but carrying debt can end up being a serious drag on our finances.

Just because we can afford the repayments doesn’t mean a loan is the best option. Getting into debt is quick and easy. Getting out is much harder and may take years. All too often, easy credit becomes a problem that drags us down further.

Before you borrow, explore the options to make sure it's the best choice for you.

In this guide

How interest works when you borrow

Get savvy with your borrowing

What’s the true cost?

When is it a good idea to buy an asset?

Saving to pay expenses

Knowing all the options

Know the full cost before borrowing

Things you should know before you borrow money

Before you borrow, explore the options to make sure it's the best choice for you.

Going into debt is risky business, for both the lender and the borrower. The lender may not be sure if they’ll be paid back. If they think you’re more of a risk, they charge you higher interest. There’s more on how that works below.

As a borrower, your risk is that the loan may seem like a good deal to you, but your circumstances could change, leaving you unable to repay. Or a critical emergency might crop up, so you have to pay for that instead of repaying your loan.

You can be a smart borrower by knowing what you’re signing up for, reading the fine print of your credit contract, and having an emergency fund at the ready if anything goes pear shaped. You’ll want to make sure you have a good plan in place to pay back the money you’re borrowing.

How interest works when you borrow

When you take out a loan or use credit, the price you pay for using other people’s money over time is charged in fees and interest.

Fees

There can be all sorts of fees when you borrow: setup fees, annual fees, late fees, default fees (a penalty if you miss payments).

While Buy Now, Pay Later companies like Afterpay, Laybuy or Zip don’t charge you interest, they have late fees if you miss your instalments. (They mostly earn their money by charging retailers.)

Your credit contract sets out the fees involved in your loan (it’s typically in the fine print).

Interest

Interest is what you pay for borrowing – the cost of money over time. It’s typically represented as an annualised percentage rate (you’ll see it called an ‘APR’ in the fine print). It’s how much you’d pay over a given year for each $100 borrowed.

Because interest is shown in percentages, these can seem like minuscule numbers not worth paying attention to, but those tiny figures can cost you thousands, even tens of thousands of dollars. Here are some typical interest rates:

Payday loans: 49.99%
Store cards: 25.99%
Credit cards: 19.95%
Personal loans (including debt consolidation): 12.90%
Car loans: 13.95%
Mortgages: 7.34%

You can easily see which type of loan is most expensive from those rates, but how much you end up being charged depends on how long you take to repay. The longer your debt goes on for, the more it costs you. If you take on high-interest debt like a payday loan, it’s best to treat it as an emergency and get rid of it as quickly as possible!

When you borrow, you’ll find your interest rate for your particular loan on your credit contract, but you may not know if it’s a good one or not. One way to compare is at interest.co.nz, which publishes rates for credit cards, personal loans and mortgages. Rates change frequently, and comparing helps you shop around.

Get savvy with your borrowing

Improve your credit score

Focus on the true cost of what you’re buying

Keep your borrowing to comfortable levels

Improve your credit score

Remember how your lender will charge you a higher interest rate if they think there’s more risk that you may not repay? One way to get a better interest rate, and a better deal, is to know and improve your credit score.

Your score is based on how well you paid your bills and repaid loans in the past. The higher your score, the more likely you’ll be able to get cheaper credit. Here’s our guide to credit reports and how credit scores work.

Focus on the true cost of what you’re buying

Deciding whether to borrow money to buy something involves more than just working out if the repayments are manageable. You need to keep in mind the overall cost, including the interest and fees.

One of the pitfalls to steer clear of with debt is paying more than you want to for something. Using our debt calculator can forecast how much you’ll be paying in fees and interest overall.

Keep your borrowing to comfortable levels

The other pitfall with debt is that you overextend yourself – you stretch your finances too far by taking too much on at once. It’s important to keep to your comfort level, and borrow only as much as you can handle at any given time.

Remember, debt is like fire, so you’ll want it always under control.

What’s the true cost?

Deciding whether we can afford to borrow money to buy something involves more than just working out if the loan repayments are manageable.

For example, we may be able to afford to borrow money to buy a car, but what about the costs to register, run and maintain it? Plug all these costs into the budget before deciding if it's worth borrowing for.

There may be other ways to get what we want without borrowing money. For example, we could save or put things on lay-by and pay them off in installments.

When is it a good idea to buy an asset?

There are two kinds of assets – value builders and value losers.

Value builders are assets that are likely to hold their value, grow in value or bring in income after we’ve paid for them. So they can be OK to go into debt for. A house is the classic value builder (although houses can lose value, too).

As a rule, if we keep a house for the long term (more than 10 years) the value will increase or stay about the same. And, if we needed to, we could sell the house and pay back our debt.

Education can also be a value builder. It can improve our job prospects and our income earning potential.

Value losers are assets that lose value after we’ve paid for them, like a common car. Every year the car is worth less. Borrowing to buy a car can be a risky move, especially if it loses value faster than we can pay off the debt.

If we need to borrow money to buy a car or other 'value loser', one option is borrowing only part of the purchase price instead to keep our costs down.

Saving to pay expenses

Expenses are things like living costs, nights out and holidays. Paying for expenses from income or short-term savings is ideal.

It feels easy to pay for a meal in a restaurant on a credit card in the moment. But if we take a few months to pay off the credit card, the interest charged makes that meal more expensive every day the debt isn't paid off.

Knowing all the options

When borrowing money we need to make sure it costs us as little as possible – why pay more than necessary? Even a small change in interest rates can make a big difference to the total we pay over time.

It pays to compare all the places that lend money. For example, a store will have different costs than a car yard.

It helps to have a think about:

How much do I really need to borrow?
How much interest and other charges will I pay?
How much will my repayments be?
How long will I be paying back the debt?
How often will I make repayments?
How sure am I that I want to take on this debt?

The trick is to keep the full cost in mind (which the lender must disclose by law).

Know the full cost before borrowing

Work out how much it will cost with interest included - our debt calculator can help!

Don’t know where to start?

Check out our 6 steps to get your money sorted.

Head to the 6 steps

6 steps to get your money Sorted

Start your emergency fund

Get your KiwiSaver on track

Tackle your debt

Cover your people, money, stuff

Work out your retirement number

Set your goals, then reach them!

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Things you should know before you borrow money

Reading time: 7 minutes

In this guide

Things you should know before you borrow money

How interest works when you borrow

Fees

Interest

Get savvy with your borrowing

Improve your credit score

Focus on the true cost of what you’re buying

Keep your borrowing to comfortable levels

Improve your credit score

Focus on the true cost of what you’re buying

Keep your borrowing to comfortable levels

What’s the true cost?

When is it a good idea to buy an asset?

If we need to borrow money to buy a car or other 'value loser', one option is borrowing only part of the purchase price instead to keep our costs down.

Saving to pay expenses

Knowing all the options

Know the full cost before borrowing

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