Personal loans offer competitive interest rates and flexible repayment terms. Use a personal loan to simply boost your bank balance, take that much needed holiday or treat yourself to something special. The choice is yours!
This guide will help you choose the right type of personal loan, the right repayment terms, the right lender and the right loan features.
Section 1: Understanding Personal Loans
The phrase “personal loan” could be used to describe a range of credit options from a payday loan to a car loan – provided that it is credit that is issued on a once off basis, that interest and/or fees are charged and that it is then repaid within an agreed time frame.
That being said, when we speak of a “personal loan” in this guide we do not refer to payday loans, quick loans, business loans or any other type of loan that falls into another category and cannot be considered a general purpose loan for personal use.
Personal Loan Uses
A personal loan can be used for just about anything but, that doesn’t mean that it is a good idea to do so – especially when considering things like purchasing a car or starting a business. Personal loans are typically used for the following:
- Debt consolidation
- Home renovations
- Overseas holidays
- To purchase electronics
- To purchase furniture
Who Offers Personal Loans?
When you need a personal loan you have many more options than just your local bank. You can opt to make use of a peer-to-peer lender, a credit union, an online lender or even a pawnbroker.
Banks: These brick-and-mortar lenders generally offer average interest rates, standard fees, competitive products and good overall services. Using a bank to get a personal loan can be one of the cheapest options if you have good credit.
Credit Unions: Credit unions operate very much like banks in terms of the services and products they offer to customers however, they typically offer lower interest rates and lower fees than banks do. This is because they are member owned and value orientated rather than profit driven.
A P2P Loan: Peer-to-peer lenders act as an online middleman between people that want to borrow money and people that want to borrow it to them in hopes of achieving a higher than average return on investment. This is likely to be one of the most affordable loans.
Alternative Lenders: If you have less than perfect credit or need your personal loan very quickly you can make use of a smaller boutique lender or an alternative online lender. These loans may be interest based or may carry a once off percentage fee and ongoing loan management fee.
What’s important to consider is whether or not the product they’re offering meets your needs, has reasonable repayment terms, affordable interest rates and low fees. If any of these needs are not met it may be preferable to look elsewhere or reconsider your need to borrow money completely.
What about Brokers?
Brokers do not offer loans directly but rater partner with a panel of lenders and help borrowers get matched up with a lender and loan product that they qualify for and that meets their needs.
When you apply with a broker the broker will send out your application to this panel of lenders and relay to you what options you have.
While there are many helpful brokerage services, many of them offer customers the loans which will earn them the highest commission. If you are new to lending it is always best to avoid brokers and make use of direct lenders only.
Section 2: Secured versus Unsecured Loans
Essentially there are two different types of personal loans – secured and unsecured. Once you choose which of these two types of personal loans will suit you best – you will find it a lot easier to find the right type of lender and loan.
Unsecured: Unsecured personal loan are loans that do not need to be secured against a motor vehicle, property or other asset and typically come in smaller amounts with higher interest rates than secured loans carry. These loans can be used for holidays, weddings and debt consolidation in certain cases.
Secured: A secured personal loan is typically used to purchase a vehicle, take out a larger loan or, when the borrower has a bad credit history and cannot secure an unsecured loan. The loan will be secured against the vehicle or asset being purchased or against a property. Secured loans typically carry a low interest rate than unsecured loan as the lender can repossess the asset to make up for a default.
Section 3: Fixed vs Variable Rate Loans
Fixed: A fixed rate personal loan is one where the interest rate the lender applies to your loan does not change over the entire course of the loan. With this option you will know exactly what your repayments are going to be for the life of the loan so you can budget accurately. The downside is that you will typically pay larger installments on the loan than with a variable rate loan.
Variable: When you take out a variable interest rate loan, you will not always be able to predict what your repayments will be since the rate may stay the same, increase or decrease over the lifetime of the loan. This kind of loan typically carries a lower interest rate but makes it harder to budget and can increase significantly.
Section 4: Comparing Personal Loans
One of the best ways to compare secured, unsecured, fixed and variable interest rate loans is by using a loan comparison site like Canstar, Mozo or Info Choice among others. This will allow you to view a variety of lender’s products, their rates, fees and options.
Questions to Ask Before Taking out a Loan:
- How much do I need to borrow?
- Should I opt for a secure or unsecured loan?
- Would a variable or fixed interest rate better serve my needs?
- Which lenders offer what I need?
- What is the interest rate?
- Can I repay my loan early with no penalty?
- What additional fees will I be charged?
Section 5: Qualifying & Applying for a Loan
In order to apply for a personal loan from any of the hundreds of lenders in the country you need to be at least 18, have a regular income, a good credit history and be either a citizen or permanent resident of Australia.
While most lenders offer an online loan application there are still a few credit unions and alternative lenders who only accept face-to-face applications within a branch.
If you know of a branch where you can apply and have no issues taking the time to do so then you do not have to look for a lender that allows you to apply online. If you want a quick and paperless application than an online lender or a peer-to-peer loan will be your best bet.