A rundown on personal loans

Even if you’re a savvy saver, it can be tricky and time consuming to pay for something outright.

But it’s hard to know where to start when it comes to personal loans.

Whether you’re paying for a big purchase like a car, or a life event like a wedding, we can tell you what you need to know about personal loans so you can find the best one for you.

What is a personal loan?

A personal loan is a specific amount of money borrowed to you to pay for something that you can’t buy outright.

Personal loans allow us to enjoy peace of mind by not needing to cover full costs on the spot. You just have to repay the money and the interest over an agreed timeframe (known as a term).

Why would you want one?

Money can often be tight.

We can’t plan for emergencies or rely on breaking the piggy bank every time unexpected expenses occur. Plus, let’s not forget everyday life expenses on top of that as well.

Personal loans can help us to balance out the needs and wants in our lives.

Is it bad to take out a personal loan?

No, not at all. In fact, it’s quite the opposite.

Loans don’t necessarily mean you don’t have money in the bank or you’re struggling to make ends meet. It’s a system for you to organise your other expenses.

Given you can make your repayments on time, taking out a personal loan can relieve you from the stress of sorting out major expenses while being able to enjoy other things in life.

The low-down on personal loans

Whether it’s a small loan to help with the unexpected or a larger one for your dream home, there are different types of personal loans to consider.

We recommend researching different lenders to find out which one has the right loan for you.

Secured Personal Loan

Think about someone lending money to you for the first time – how are they sure that they’ll ever see their money again?

Showing a lender that you also have something at stake means that they would be more likely to give you a loan.

Secured personal loans take effect when you give the lender something in exchange that they can use to sell for money back if you fail to repay on time. This could be a car or a high-valued asset.

If you do choose to take a secured loan, your interest rate will be lower than if you choose the unsecured option.

Unsecured Personal Loan

As the name suggests, an unsecured personal loan means the lender is relying on good faith when they lend you the money.

Basically, it means that they’re not guaranteed to get back the cost of the loan as you’re not securing an asset (like a car) against it.

If you can’t pay it back, the lender can seek legal justice and take you to court to get back the money owed by you.

What about interest rates?

When you take out a loan, keep in mind that it may or a fee – sometimes maybe even both.

Why do you have to pay money to borrow money? Because you’re paying to use money you don’t have yet.

Fixed

Getting a Fixed interest rate would mean that the interest is not variable and won’t change throughout the life of the loan. This means you’ll know the amount of interest you’ll be paying over the life of the loan.

Pros:

• This is great for those who want to pay the same amount each time, making expenses easier to keep track of and budget for.

Cons:

• As supply and demand for money/credit in the current market is what increases or decreases an interest rate, you have to decide whether you see the rate going up in the future. If so, you can lock in a fixed rate to pay a low amount for the life of the loan. A good example would be the housing situation in WA at the moment – as there is a travel ban, people are looking towards buying a home. This would mean that interest rates are only going to rise as the demand for credit is at a high to finance a house.
• If you want to make an early repayment, a fixed interest rate may mean you have to pay a fee.

Variable

A Variable interest rate means that the rate you pay may vary from time to time during the life of your loan.

Pros:

• If the interest rate goes down, you can pay a lower rate
• You may not have to pay a fee to make an early repayment

Cons:

• If the interest rate rises, you’ll be paying a higher amount

How is an interest rate calculated?

The most common one is simple interest which is the most basic type of rate. Simple interest is paid only one time and does not change. With this method, you just need to multiply your loan balance by your interest rate and divide it by 365. This will show your daily interest charge. As interest is usually charged monthly, the daily interest amount is then multiplied by the number of days in the month and for the term of your loan.

Where do I get a personal loan?

Banks and retail lenders are your best place to start. The most important part is choosing a lender that works for you.

Everyone’s needs are different, so the best loan is one that will meet your expectations and financial situation.

We recommend researching the different loans available to figure out which one is right for you, comparing all the factors against each other.

What are the features of small loans you should compare?

Good question! Knowing what to look out for will make your life easier when it comes to taking out a small personal loan.

• Fees
  Don’t get stumped over hidden fees. Look out for numbers that you aren’t familiar with and make sure you know what you’re in for. Use a repayment calculator to figure this out beforehand.
  
  
• Interest rate
  You know what they say, ‘It all adds up'. Knowing your interest rate will either help you cut down costs over time or show you’re paying too much.
  
  
• Repayment methods
  Life happens. Flexible repayment methods vary between lenders, with some more lenient than others.
  
  
• Redraw facility
  This means that you can withdraw the money you’ve already paid towards the loan in case of an emergency.
  
  
• A lender that cares
  A lender that wants the best for you is the lender you need. Pay attention to how your lender treats its customers and research reviews online.

Who can get a personal loan?

Anyone can apply for one.

However, there are lots of things that determine whether your application will be approved, like your ability to repay the loan without trouble.

Here are some things to consider before applying for a personal loan:

• Have you checked your credit rating? A poor credit score could limit your lenders, and it may be hard to find one who will approve your application.
• What about your credit cards? Your credit history can say a lot about you. Make sure it shows the lender that you’re a responsible credit card holder.
• Do you think you can keep up with repayments? When we take on too much, it can get the better of us. If you have a lot going on with other payment commitments, you may want to look at alternative ways to get instant cash like selling unwanted items that you no longer use.

Do personal loans show up on my credit score?

Yes, taking out a personal loan can affect your credit score.

The whole process relies on trust. If a regulator can see that you’ve made too many applications, missed repayments, or that you’ve chosen a high-risk lender, you may not be approved for a loan.

How are personal loans regulated?

The Australian Securities and Investment Commission regulates lenders to make sure that money isn’t lent to those who have a poor history of paying it back.

The world of loans can seem scary and intimidating – we get it. If you do your research and ask the right people for advice, you’ll be ready to take on anything that comes your way.

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