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Tips for comparing personal loans
Looking to make major purchase, go on a holiday or perhaps to consolidate your existing debts into one simple regular repayment? When comparing personal loans, there are other important things to consider and understand, other than just the interest rate.
Are you eligible for a personal loan?
Before you apply for a personal loan, be sure to understand and meet the financial institution’s lending criteria. Below are examples of what may be included in the lending criteria:
- Minimum age. 18 to 21 is a standard range
- A verifiable and steady employment. Often you will be required to provide copies of your most recent pay slips
- A good credit history. For example, no recent defaults and no frequent requests for credit
- Most lenders require you to be an Australian citizen or permanent resident
- Credit cards with large credit limits are seen as liabilities, even if there’s nothing owing. If you have existing liabilities, be certain you can pay them off in addition to any new liability
There are many additional factors banks consider when accessing your application, but the above are the most important. If you feel like you may not meet the banks eligibility criteria, it may be best to save!
What can you use a personal loan for?
Lenders will allow you to borrow for almost any worthwhile purpose. No, going to the casino and putting it all on black is not a worthwhile purpose. When comparing loans, use our “loan purpose” filter to find providers that could best suit your needs. Examples include:
How much and how long can you take out a personal loan for?
Minimum and maximum loan amounts vary between $1,000 and $100,000+. Loan terms vary from 6 months to 10 years. Though the exact number varies between lenders, your eligibility and whether you secure the loan.
What’s the difference between secured and unsecured loans?
Secured personal loans use an asset you own as collateral. If you are unable to repay the loan, the lender can then repossess and sell the asset to recoup some or all of the losses from the unpaid loan. If you own a car, property, term deposit or some other valuable asset, you will likely be offered a lower interest rate in exchange for offering it as collateral. You could potentially borrow a larger sum of money if you offer security and the meet the lending criteria.
Unsecured personal loans are loans where you do not put up an asset as collateral. Unsecured loans are higher risk for the lenders, because if you default on the loan, there’s a reduced possibly to recoup the loan. These types of loans come with a higher interest rate, because it reflects the greater risk
What’s the deal with fixed and variable interest rates?
Sometimes, nothing. Though other of the times, it impacts the maximum term of loan, the maximum amount you can borrow, the interest rate and whether the loan includes a redraw facility or allows you to repay early without incurring a penalty fee.
Fixed interest rates will not change over the life of the loan, which makes it easier to budget. By agreeing to a fixed interest rate for the life of the loan, there is no risk that you will miss payments because the interest rate increases. On the flipside, if there is an interest rate cut in the future, you will miss out on any possible savings. Some lenders may not include a redraw facility on fixed rate loans or will include an early repayment fee.
Variable interest rates may rise and fall throughout the life of your loan. This could potentially mean that you will save money in the future if interest rates fall, but if interest rates rise in the future could become difficult to continue to meet the monthly premiums. Variable interest rate personal loans tend to be more flexible for payment terms than fixed rate loans, which gives you more options to manage your finances and tailor your payments to work for you.
What is a peer-to-peer loan?
Peer-to-peer loans have been popular in the UK and the United States for nearly a decade, but are a recent addition to the Australian financial scene. Peer-to-peer lenders give borrowers the opportunity to borrow directly from lenders or investors and bypass traditional lending institutions such as banks and credit unions.
Peer-to-peer lenders can reward individuals with good credit scores by providing loans with a lower interest rate, to reflect the lower risk. However, peer-to-peer lenders may not offer the same flexibility as a bank or credit union. For example, they may not offer the ability to repay the loan weekly or fortnightly or may not have a redraw facility.
What else should you keep in mind when choosing a loan?
When choosing a loan, the interest rate and repayment schedule are not the only important items to consider. Many lending institutions charge fees in addition to interest and hidden fees can surprise even experienced borrowers.
Comfortable repayment schedule
Most lenders allow weekly, fortnightly or monthly repayment. But not all of them, consider a provider that can make withdrawals, based on your pay cycle.
Extra repayment or early penalties
Consider loans that do not penalise you for making additional payments or paying off the loan early. These fees can range anywhere from $0 to $700, depending on how far into the loan you are.
If you are making additional payments on your loans, but something comes up and you wish you could take that payment back, luckily some loans offer the ability to redraw those payments (as long as you are paid ahead of schedule according to the repayment plan), which can help offer peace of mind to know that if something comes up. Redraw limits and fees apply to some institutions.
A comparison rate is a term used to describe the actual cost of borrowing, once you include all the application, establishment and recurring fees. In Australia, it is a legal requirement that comparison rates are based on scenarios (i.e. $10,000 over 3 years, or $30,000 over 5 years). The scenarios are found in the disclaimers. It’s important to note, that a 10% comparison rate over 3 years, will not have the same monthly repayment as a 10% comparison rate over 5 years (the 5 year comparison rate is likely to be more expansive), so be sure to read the disclaimer!