It’s always a good idea to know a little more about the credit options available on the market, so you can make informed decisions when you need to. Whatever you plan to use your personal loan for, there are smart ways and not-so-smart ways to go about spending your borrowed funds.
What’s in a personal loan?
Before you take out a personal loan, it’s great practice to understand what you’ll be looking at in terms of features. We’ve highlighted the key features of personal loans in this guide, so you can make the best decisions around your personal loan use. You’ll need to consider:
- Total loan amount – smaller loan sizes mean less risk for your bank or lender, so are more likely to be approved with less hassle
- Repayment size – can you realistically commit to the repayments that will come out of say, a $15,000 loan over 6 months?
- Repayment schedule – we’ve discussed how weekly or fortnightly repayments can help you repay your personal loan faster and with less interest, but you will also need to consider your financial situation
- Interest rate – fixed or variable interest rates will determine how much your total interest payments will be
- Secured vs. unsecured – secured loans will involve you putting up some collateral or asset as a guarantee, which may mean lower interest payments
We’ve given debt consolidation it’s own little heading because it can be easy to overlook the ways that you might consider personal loans for refinancing.
If you have several loans out at different interest rates, a personal loan could help you roll these into one more manageable monthly repayment. Say you have a car loan at 10% and two credit card debts at 18% and 20% respectively, a smart personal loan use might be to consolidate these debts. In this case, you would be looking for a personal loan which covers these combined outstanding debts in terms of value, but with:
- a lower interest rate
- favourable establishment, ongoing and prepayment fees
- flexibility with additional or early repayments
- other features your existing loans may not offer
Smart personal loan use
When you apply for a personal loan, you’ll be asked what you intend to use the borrowed funds for. Your intended personal loan use will impact how likely it is that you’ll be approved – think “personal jet pack” vs. “children’s college funds”.
Some personal loans such as secured car loans will also come with restrictions on what you can purchase, which means it’s smart to do your homework before applying. It’s worth noting that debt consolidation is considered a higher risk purpose than if you’re planning to buy an asset.
Common personal loan uses
There are several things you’ll be able to get with a personal loan, which could be up to $100,000 depending on your financial situation. This gives you more flexibility and potentially lower interest rates than credit cards for example, meaning you’ll want to consider funding for:
- Car/vehicles: although you might be required by certain lenders to take out a secured or unsecured car loan instead
- Vacations: these are typically covered by unsecured personal loans
- Business purposes: although you might be asked to apply for a business loan instead, some providers will allow personal loan use for business
- Renovations or remodelling
- College or school tuition
- Moving to a new house
- Medical bills
- Big ticket items like fridges or furniture
Hopefully we’ve helped you consider some of the key aspects of choosing a personal loan. With a better idea of personal loan uses, you’ll be better able to make a decision about comparing loans, and consolidating debt or using your funds.