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The 10 hidden costs of borrowing

The hidden costs of borrowing. Image: Thinkstock

Hire-purchase, personal loans, pay-day loans, interest-free deals. They all come with hidden costs that can make them far more expensive than they appear.

If you buy on hire-purchase (technically called a credit contract) you're spending your future income before you even get it as well as being pinged with costs you might not think about.

If you can't tame the credit beast, at least watch out for these 10 hidden costs of borrowing.

1. Establishment fees
So you think you're getting something for nothing with an "interest-free" deal? These deals almost always have establishment fees, which could be as much as $100 on a TV or computer. What's more, the fine print has fish-hooks. If you don't pay the item off on time, for example, you might well end up paying all of the interest backdated to the day of purchase.

2. Early repayment fees
Want to pay your loan off early? Beware. You might be pinged with an early repayment fee as well as the interest you thought you'd escaped.

3. Overdue fees
Woe betide if you miss a payment on your personal loan or HP. Usually you'll be charged fixed penalty fees for every month, and even sometimes every week, you're overdue. Beware that payments are often allocated to the overdue amount first, which means you might be stung with even more overdue fees if you don't clear everything owing at once.

4. Penalty interest
It's not just fees. In a cruel twist your interest rate may be increased if you fall behind. Q Card, for example, ratchets up its interest rate by 5 percentage points if you're overdue as well as charging fees.

5. Loan variation fees
If you get into trouble paying and want to alter your payment terms you'll pay a fee for that. For example, it's $16.50 on a Farmers Finance Card.

6. Payday loans
These loans — which are often sold as advances on your wages — are a very expensive way to borrow. Usually the interest rate is quoted as a weekly amount. For example Cantwait.com charges 10 percent every seven days. That's 521.43 percent per year. Ouch. Local loan sharks can be ever worse and use heavy-handed techniques to get their money back.

7. Expensive interest rates
You might be paying anywhere between 13 percent and 23 percent on a personal loan. That's a huge difference. Over one year, you'd pay $390 interest on a $3000 wide-screen TV on 13 percent or $690 on 23 percent. Always shop around for a better deal.

8. Secured loans
If you take a "secured" interest rate it means that the lender can repossess your goods or your home, if the small print says it can. The lender can then sell the goods — and won't always hold out for the best price.

9. Overdue letters
You'll be charged for overdue letters — even if they're automatically generated. A typical charge is $5.

10. Insurance
You may be encouraged or even forced to take out expensive insurances on your goods or your loan. These all add up. As well as fees galore, there is the cost of buying full-price merchandise because you can get HP from one store. You might be better off shopping elsewhere for less.

Finally, it's a really good idea to know your consumer rights when it comes to borrowing money. The Credit Contracts and Consumer Finance Act has some very specific rules about fees and what can and can't be charged. You're more likely to find breaches of this law from small local lenders. That's not to say that the giants don't try it on as well with this relatively new law.

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