Choosing A Personal Loan
A personal loan can be a great way to fund large purchases, but how do you choose the right personal loan for you?
There are a number of different personal loans available in Australia, and the right one for you will depend largely on what you need the loan for.
In this guide we will run through the different types of personal loans available, as well as looking at what factors you should consider when comparing and choosing a loan.
Types of Personal Loans
All personal loans will fall into two categories, which are secured loans and unsecured loans.
A secured personal loan is one that is secured by an asset. The most common form of secured personal loans are car loans, where the loan is secured by the car. Basically this means that the lender has every right to take possession of your car if you default on the loan repayments.
An unsecured personal loan is not secured by any particular asset. This doesn’t mean that the lender cannot take your assets if you do not repay the loan, however they will have to go through a number of other steps in order to recover their money.
Secured personal loans are generally only available on vehicles up to a certain age or value, however there are some smaller lenders who will issue secured loans over a range of different assets. An example of this would be pawn brokers who issue small loans secured by electrical equipment and other items of value.
Lenders see secured personal loans as a lower risk for them than unsecured personal loans, and for this reason the interest rate on a secured loan will generally be lower.
Another type of personal loan that has seen a significant increase in take up are short-term payday loans. These loans are usually unsecured and require you to be working in a permanent part time or full time role. The loan amount plus fees are taken via direct debit from your bank account on the date of your next pay.
Comparing Personal Loans
Once you have determined whether a secured loan or an unsecured loan is right for you, the next step is to start comparing the different loan products available from the banks and other lenders.
The interest rate is one of the first things to look at, and generally you will want the loan with the lowest rate. You must also consider any upfront or ongoing fees as well, as there is no point choosing the loan with the lowest interest rate if it is offset by high fees.
It is also important to consider the flexibility offered by the loan. The main objective with any loan should be to pay it off as quickly as possible, so you need a personal loan that will enable you to do this without charging high break costs or penalties.
The Right Loan for You
If you are purchasing a vehicle, generally a secured personal loan will provide you with the best interest rate and overall package. If however you find an unsecured loan which is offering a better deal, there is no problem in going that way.
For items such as furniture, a holiday loan or a debt consolidation you will generally find that an unsecured personal loan is the only option. In this case you will simply be looking for the loan which offers the most competitive interest rate and fees, whilst still offering the flexibility to make extra repayments.
A personal loan can be a great way to fund large purchases, and by choosing the right loan you can potentially save hundreds of dollars in fees and interest over the life of the loan. The wrong type of loan can add up to paying more interest and having less financial flexibility.