Guide to personal loans in Australia – Forbes Advisor Australia


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A personal loan can provide extra funds to buy something special, like a car or a vacation. With cost of living pressures are risingmany Australians are short on savings and are turning to personal loans to fund their financial goals.

A personal loan can be a better alternative than contracting credit card debt, because the interest rate is generally lower than the current rate of 14% on a credit card. Taking the time to find a loan with the lowest interest rate and fees could save you thousands of dollars.

A personal loan can be used for various purposes. Often a lender cares less about the purpose of the loan and more about whether it can be repaid. Here are some common ways to use a personal loan:

  • A car
  • Holiday
  • Home renovations
  • Large appliances like a fridge or TV
  • To consolidate existing debts

How do personal loans work?

Some lenders use risk-based pricing for personal loans, which means the interest rate will depend on factors such as your credit score, income, expenses, and savings.

The typical period to repay a loan is usually between one and seven years. Loan repayment is faster because it saves on accrued interest, but be aware that some loans charge an exit fee.

The minimum amount for most loans ranges from $1,000 to $5,000, depending on the lender. The maximum depends on the type of loan. You can borrow up to $2 million with a secured personal loan, while an unsecured loan typically caps between $60,000 and $80,000.

Different types of personal loans

  • Variable rate vs fixed rate: With a fixed interest rate, refunds are set in stone. This means that you know precisely how much will be debited from your bank account each month in refunds. A variable interest rate means your repayments change if interest rates go up or down. If interest rates rise, your repayments will be higher. A variable interest rate loan usually has no early exit charge
  • Unsecured vs Secured Loan: A secured loan involves an asset being used as collateral for the loan. Often the asset is a car. If the loan is not repaid within the stipulated time, the lender can repossess the asset and sell it. Secured loans generally have a lower interest rate than unsecured loans.
  • Loan with guarantor: A friend or family member guarantees the loan in case of default. A loan with guarantor can come with a lower interest rate because the risk to the lender is reduced. Make sure the guarantor understands what they have agreed to.
  • Unsecured loan: An unsecured loan has no asset attached as collateral. A guarantor may be required. If you are unable to repay this type of loan, the lender can sue you for a refund.
  • Credit line: A line of credit is a flexible loan for a set amount that you can access as needed. It can be repaid immediately or over time. Interest begins to accrue from the time the money is borrowed.
  • Debt consolidation loan: This is also known as refinancing and involves consolidating multiple debts into a single loan. Repayments may be easier to manage, but the interest rate and fees could be higher. It might also be tempting to start spending more money, so be careful not to end up with more debt in the long run. If debt is overwhelming you, contact the National Debt Helpline on 1800 007 007 for free advice on how to get back into the black.

How to choose a loan

There are many types of loans and lenders. Find a loan that suits your situation and has the lowest fees and interest.

  • Shop around for the lowest rate and be sure to look at the comparison rate and not just the interest rate. The comparison rates correspond to the interest rate and most fees. Comparison sites compare different options, but keep in mind that most of these sites earn a commission for referrals and may not compare every product on the market.
  • Fees: There may be application fees, as well as monthly service fees and missed payment fees. Read the fine print to see if there are any others that might apply.
  • Do the terms of the loan allow you to make additional repayments without incurring exit fees? If you’re confident you’ll be able to repay the loan faster than the time allows, look for a loan that doesn’t penalize early repayment.
  • Note that the longer the term of the loan, the more interest you will pay. Choose a term that is realistic for your financial situation.
  • Loan Terms: Some loans can only be used for certain things, while some lenders only focus on repaying the loan itself.
  • Ease of withdrawal: If you make additional repayments on the loan, you may be able to access them later if you need them.

The application process

There are a number of steps that make up the application process, including borrower-initiated steps. These include:

  • Check your credit score first so you know what your bargaining power is and if you are likely to be successful in your loan application.
  • Determine your budget based on your needs and financial situation.
  • Make a short list of lenders who meet your needs and who, above all, will lend for the project you want to carry out. Some lenders only give loans for certain purposes, such as buying a car or home renovations.
  • Choose your lender and submit your application: Although lender requirements vary, the basics needed to apply are key identification documents, proof of income in the form of a payslip, bank statement or list of transactions, an employment contract and/or a tax declaration.

Expect! What about your credit score?

A credit score is used by lenders to assess whether a person applying for a loan is likely to repay it. It is also known as a “credit score” and is based on an individual’s personal and financial information in a credit report, such as how often you applied for credit and whether you repaid time.

You can access your credit score and credit report once every three months for free. Knowing your score will help you negotiate better loan terms or understand why you were rejected.

The lowest score is zero and the highest is 1000 or 1200, depending on the credit reporting agency.

If there is a factual error in the information that was used to calculate your credit score, it is possible to request credit repair at no cost.

Some information about missed or late payments cannot be changed. Beware of so-called credit repair companies, as they are unlikely to keep their promises and charge exorbitant fees to do things that someone could do for free.

Which bank to choose for a personal loan?

There’s no one lender that’s the best loan provider: a bigger determinant of the fees and interest rate you’ll pay is your credit score. However, it always pays to shop around when it comes to a loan, as finding a lower interest rate can lead to substantial savings.

How much can I borrow?

Most personal loans are between $5,000 and $60,000. If you need to borrow a small amount like $2,000, it may be possible to get an interest-free, no-fee loan with quick approval.

The borrower can designate the amount they wish to borrow, but the lender may offer less after evaluating your request.

Can I get a personal loan with bad credit?

Lenders are less likely to give a loan to someone with bad credit, but that doesn’t mean it’s impossible. It is likely that the interest rate and fees will be higher.

If it’s possible to wait while you improve your credit history by making repayments on existing debts, the chances are higher of getting a loan in the future.

What is the maximum amount I can borrow on a personal loan?

Most lenders, whether large or small, cap their loans at $60,000, although loans of up to $80,000 are not unheard of.

How quickly can I repay a personal loan?

The repayment term of a personal loan can range from two to seven years. If you pay it off sooner, you’ll save on interest charges. Check before getting the loan if there are any exit fees.

Even if there are exit fees, it can still be beneficial to pay off the loan early, as you’ll save more by not paying interest over an extended period. It depends on how far along the loan repayment term is, so do the math first.

How long does it take for personal loans to be approved?

Generally, it takes between one and seven days to be approved for a loan. Some lenders work faster than others. A person with a lower credit score may take longer to assess.

What if I need a loan immediately?

Contact the National Debt Helpline if you are in financial difficulty. It provides free advice on how to get out of debt:

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