Into the red: 5 things to know before getting a personal loan

Credit can be a cunning thing. A personal loan may be preferable to a credit card for some, but there are five things borrowers should know before applying.

"Credit cards can be a trap. Many people can't stop spending if there is available credit, which means if you lack self-control, a credit card is the worst thing you can get," said David Lennon, the founder of You're Welcome Finance.

"I strongly believe personal loans are the best way to consolidate debt and borrow money for life experiences and purchases."

However, borrowers may run into difficulty in a complex market, he added, noting that choosing between banks, credit unions and payday lenders can be a headache in itself.

"This also probably explains why the number of complaints received by the Financial Ombudsman Service in 2016/2017 was up by 11 per cent on the previous year with teenagers as young as 18 being lent large sums of money. Most of the complaints were about personal loans provided by banks."

He said there are five rules borrowers should follow when choosing a personal loan.

1.       Does it have a good interest rate?

Mr Lennon said the first rule is to make sure you're receiving the best interest rate for the loan as even small differences will add up over time.

2.       Set-up fees and charges

He said borrowers should ask whether potential lenders charge administration fees for setting up the loan.

3.       Early repayment penalties

With some loans, borrowers are penalised for paying off their loans early as it means the lenders miss out on the expected interest, Mr Lennon said.

4.       Late payment fees

Borrowers could also cop penalties for late repayments, Mr Lennon said. It's critical to make repayments on time, but borrowers can also face unexpected difficulties in servicing the loan so it's important to assess the size of the fees for late repayments.

5.       Find a good broker

Mr Lennon argued a broker is the "best way to go about sourcing a loan product", as they can help clarify requirements and obtain the best product without having to undertake multiple applications.

He said he hopes borrowers' confidence in brokers is healing, thanks to revelations made in the royal commission.

"While the royal commission has uncovered concerning behaviour in the finance sector, it has also helped to clarify that brokers disclose all of their payments and commissions to clients, unlike bank-employed lending officers who are not required to disclose what type of bonuses or financial benefits they receive for writing business for their employer."