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A personal loan is a loan offered by lenders to cover purchases which are significantly less expensive than a home, such as an overseas holiday, home renovation, or new car, as well as to consolidate debt. You’re typically required to repay the loan with interest over a fixed period.
How your personal loan works can depend on the type of loan you take out. Some of the types of various personal loans offered by lenders include:
This loan type doesn’t require an asset to be used as collateral. Because of this, unsecured loans could be perceived as higher risk to lenders, and could attract higher interest rates.
This loan type requires an asset to be used as collateral for the loan, meaning that if you default on payments, the lender can repossess the asset to recoup losses. An example of a secured asset could be a car.
This is a personal loan with a lower interest rate offered by the lender. However, it’s worthwhile to use the comparison rate to compare it to other loans, which factors in other fees and charges to get a more accurate view of whether a low interest loan is still a good deal*.
This is a loan which allows you to pay off other existing debts (such as multiple credit cards or loans) and consolidate them in one place, which could make your debts easier to manage, and even could save you money in fees.
This loan comes with a static interest rate which could give you certainty on exactly what your repayments will be over the life of the loan. The fixed rate offered by lenders can change depending on your credit history, and whether the loan is secured.
This loan comes with an interest rate which could change over the course of the loan term, meaning your repayments could increase or decrease over time depending on the changing interest rate. Variable rate loans can come with a redraw facility, allowing you to make additional payments without extra charge, helping to potentially offset some of the increase in repayments you’d need to make if interest rates rose.
Personal loans come with a range of benefits and disadvantages. Whether or not a personal loan is suitable for you depends on a range of factors, so here are a couple of pro’s and con’s that are worthwhile to consider as you compare available products:
When comparing personal loans on offer to see if you can find a good deal, there’s a variety of different products features to consider*. Here are some of the key ones to get you started:
This is the rate of interest the lender can charge on the outstanding balance of your loan. A higher interest rate and outstanding balance generally leads to increased minimum repayments. . Typically, the more you’ve repaid, the more your repayments contribute to the loan principal, rather than interest.
This number is stated as a percentage and takes into account the lender’s advertised interest rate, as well as other fees and charges to give you a more complete view of the loan cost. Whilst looking at a product’s interest rate is important, the comparison rate is typically more helpful when it comes to comparing products in a more ‘like for like’ fashion, because as mentioned earlier, the comparison rate takes into consideration the overall cost of the loan (including interest rates, fees, and charges). This is important as one loan could have a lower interest rate than another loan but cost more in fees. The comparison rate would reflect this additional cost and potentially help you avoid unnecessarily selecting a more expensive loan.
Whether you choose a fixed or variable interest rate product can have a significant impact on your overall interest repayments over the life of the loan. A fixed rate loan can help you map out what your repayments could look like with more accuracy, whereas with a variable rate loan, your interest payments could increase or decrease depending on changes in the interest rate.
This is the agreed period of time in which you’re required to repay the loan. For example, five years. The loan term could play a key role in determining how easy it is for you to manage your repayments.
Including sign-up fees, monthly fees, late payment fees, early repayment fees
Most loan products come offered as secured or unsecured, however you may be able to offer a security in order to negotiate a lower interest rate. Secured loans simply require an asset to be used as collateral for the loan, such as a car.
Most lenders offer the flexibility of either weekly, fortnightly, or monthly repayments. Consider which arrangement suits you before making a decision.
Whether you can make additional payments over and above the minimum required payments, and whether or not you’ll incur an additional charge to do so.
Some lenders offer the ability to have a redraw facility, and this is more typical across variable rate loans. A redraw facility allows you to withdraw any additional contributions you made towards your loan, over and above the minimum required payments.
Whether or not there are any conditions on how or what you spend the funds on.
With iSelect you can compare personal loans available from a range of products and providers, and select the one which suits you*. Once you click out to your chosen lender, you can begin the formal process of applying for a personal loan.
The lender will typically require more information, such as your employment status, income, and whether you have any dependents. As part of the process of applying for a personal loan, the lender will also perform a credit check to get an impression of your credit history. Depending on the contents of your credit report, the lender may accept or decline your application, or there may be some additional changes to your loan agreement, such as the interest rate and whether or not the loan needs to be secured, before the agreement is signed and funds settled.
Unfortunately, there is no “best” personal loan or even a “cheapest” personal loan. Finding a loan that’s suitable for you can depend on a range of factors, which is why it’s beneficial to compare products from different lenders*.
Additionally, a product which looks “cheap” because it has a lower advertised interest rate, could actually end up being more expensive than another product with a lower advertised rate, due to other hidden fees and charges. So it’s always worthwhileto review the comparison rate, additional fees , as well as the terms and conditions of the product before making a decision.
As with any financial product, it can pay to compare different lenders, products, and offers to ensure you find a good deal*. However, it’s worthwhile to really understand the product you decide on, as sometimes a great ‘introductory offer’ might not come with the features and flexibility that suits you over the life of the loan.
Here are some additional tips for finding a good deal on your personal loan:
As part of your application process, lender’s will perform a credit check to understand your level of credit risk. A licensed credit agency will provide the lender with a list of any loans or credit products you’ve taken out in the past, including unsuccessful applications, and how you managed repayments on those products.
If the lender sees that you’ve defaulted on loans, declared bankruptcy, are currently managing several credit products, have made a large number of applications to different credit products in a short period of time, or have a history of failing to make repayments, then this could negatively affect your application for a personal loan. In short, a poor credit history could result in a rejected application, a higher interest rate, or the lender requesting an asset to be used to secure the loan.
Personal loans can be used for a number of different purposes, such as financing a new car, funding renovations, or having the funds to purchase that dream boat! However, some personal loans may come with a contractual agreement that the funds are used for a specific reason.
For example, secured personal loans typically require that the asset being purchased (such as a new car, boat, or motorcycle) is also used as collateral to secure the loan. Some of the common examples of what personal loans are used for can include:
Interest payments on personal loans work more like home loans than say, a credit card. That is, interest is typically calculated on the total outstanding balance of the loan. Generally, your monthly, fortnightly, or weekly loan repayment includes the minimum repayment plus interest (which is expressed as a percentage of the total outstanding balance), as well as any included fees or charges.
Additionally, personal loan interest rates can either be fixed or variable.
Some personal loans can come with a redraw facility, depending on the product and lender you decide on. A redraw facility works by allowing you to make payments towards your loan over and above your minimum obligations, whilst also allowing you to withdraw (or ‘redraw’) those funds back for your own use if needed. This can have the added benefit of reducing the amount of interest you’ll have to repay over the life of the loan, and also give you the flexibility to potentially pay your loan off faster, or even withdraw the funds if you require them.
However, a redraw facility could also come with additional fees, so it’s beneficial to understand the terms and conditions before selecting a product. It’s also worth noting that redraw facilities are typically more common across variable interest rate products as opposed to fixed interest.
When comparing personal loans, you’ll likely come across loan products which are either secured or unsecured.
Personal loans can come with a range of different fees and charges. These fees are at the lender’s discretion, and can vary considerably across both products and lenders. It’s worthwhile to weigh up all of the fees, as well as interest rates, to ensure you understand the full cost of the loan. Alternatively, you can look at the comparison rate to get a better view of the overall cost of different loans you’re comparing.
Some of the potential fees include:
What are some of the risks of taking out a personal loan?
Finding a good deal on your personal loan by comparing a range of products, and ensuring you select a loan amount with repayments you’re able to comfortably manage along with your other expenses is a good way to lower the financial burden you’re taking on. That said, personal loans, like any credit product, are not without their risks.
Some of these risks include:
When comparing personal loan products, it’s worthwhile to select a product with terms and conditions that aren’t going to stretch you financially. Not only can missing repayments or even defaulting on your loan lead to increased debt, but they can hurt your credit score, potentially making it even more difficult to secure credit in the future.
However, if you do find you’re struggling to make repayments, you might consider speaking to your lender as soon as possible. They may be able to take action to provide financial hardship assistance such as by arranging changes to your agreement that make it easier for you to manage repayments.