There has been an ongoing increase in the cost of living over the years. People need more and more things in order to survive. There was once a time that only a few people had on-demand access to computers, and that was not a big issue. Now, if you or your kids (if you have any) do not at least have a laptop at home, then you are going to miss out on a lot of education or career-related resources. Unfortunately, there are times that we want or need something that is a bit out of our financial reach. This is when you can consider getting a personal loan in Australia.
Taking out a loan can give you the extra cash that you need to be able to pay for an emergency bill, a big purchase, or even a new car. It can provide a helping hand to get you to the next level of your life. But do you know which loan is right for you? Have you considered other options? Is taking out a loan the best path for your situation? Here is a complete guide to personal loans in Australia.
What Is a Personal Loan?
First of all, you need to know what a personal loan is all about. What is a personal loan anyway? Just as its name suggests, it is a loan that you personally take out from a lender for personal use. Personal loans are usually offered with a fixed rate with no collateral, and you need to pay it over a specified period.
Typically, personal loans can be as small as $2000 or as big as $100,000. Depending on the lender, the amount you borrow may be repaid for up to seven years. You would need to talk to the lender about the amount and your repayment options. Although a personal loan is typically unsecured, some lenders have a secured option as well. It will depend on what you plan on using the loan for.
You can take advantage of a personal loan for when you have an urgent need for cash, but the situation is not considered as dire enough to take out some of your emergency funds.
Is a Personal Loan Different From Mortgages or Credit Card Debts?
Yes, personal loans differ from mortgages and credit card debts in many ways. For instance, a mortgage is usually paid off and measured in decades and they require high-value assets, such as your house as security. Meanwhile, personal loans in Australia are measured in months or a few years. Plus, personal loans offer unsecured options which do not need collateral.
Credit cards are like open-ended loans. This means that you can pay off—and re-use—your maximum credit limit on an ongoing basis. This also means that your required payments can vary over time. On the other hand, if you make your repayments on time, a personal loan can give you a precise end-date to the agreement. Personal loans allow you to budget your monthly income better.
About the Rates of Personal Loans in Australia
Take note that when you take out a loan, you are not just paying for the amount you borrowed. You will also be paying back interest on top of the original amount. This is true regardless of whether your loan is secured or unsecured.
There are two kinds of interest rates: fixed and variable.
If you take out a fixed-rate loan, just as the name suggests, the interest rate is fixed for an agreed term, and it continues to be constant throughout the agreed period. However, you need to take note that some lenders charge a break fee if you pay off your loans early.
Meanwhile, the interest can change with a variable rate loan. The rate can go up or down depending on fluctuations in market interest rates.
About Loan Terms of Personal Loans in Australia
What is the definition of a loan term? A loan term tells you the duration of how long you have to pay for your loan. Depending on your lender, you can either make weekly, fortnightly or monthly repayments regardless of the duration of the loan.
Take note that the shorter the loan term, the more you need to pay each month. However, if you opt for a longer loan term you will be paying less monthly but will end up paying more interest overall.
About Fees and Charges
Make it a habit to read the fine print on your contract or agreement with the lender, because most loans come with additional fees nowadays. These fees may include an application fee, account handling fees, late payment fees, dishonour fees, charges for making early payments and more. So make sure to read your agreement carefully to avoid incurring additional expenses.
What Do You Need to Consider Before Applying?
You should not take out a loan just because you want to or just because you can. And if you are doing it just because, then you need to stop. Think about the reason you want to take out a loan and ask yourself the following questions:
- How much do you need to borrow?
You need to know this because you may be applying for the wrong type of loan. If you need to borrow less than $2000, maybe you want to consider applying for a short term loan instead.
- How is your credit rating?
Lenders will do a credit check before they process your application further. If you have bad credit, then you can expect lenders to offer you loans with higher rates. If this is something that you want to avoid later, try shopping around for a short term loan.
- Do you have any equity or assets that you can use as collateral?
If you are after a low-interest rate, then you would want to apply for a secured loan; however, you would need to have an asset that you can use as security.
- Do you need a lump sum or will you need more funds throughout the loan?
If you are going to need access more than once over a long period, then consider choosing a personal line of credit or overdraft.
What Personal Loans are Available in Australia?
There are different kinds of personal loans for you to choose from and applying for the right one can save you a lot of money on interest repayments in the long run. Here are the different kinds of personal loans:
- Line of Credit
We have already discussed Variable Rate Loans and Fixed Rate Loans above, so let’s move on to the other types of personal loans in Australia.
Secured and Unsecured Loans Overview
A personal loan can be secured or unsecured. The main difference between these two kinds of personal loan is that a secured loan requires you to put up an asset as collateral. For instance, if you plan on buying a car with your loan money, then your lender may have you put your car down as your asset. In the case that you fail to make repayments on your loan, your lender will have the rights to repossess your vehicle to make up for the shortfall.
As mentioned previously, unsecured loans will not require you to put down an asset as collateral. However, the lender may offer you a loan with a higher rate. This also does not mean that you can run away from your repayments, there will still be legal consequences if you don’t make your required loan payments.
Three Points of Difference Between Secured and Unsecured Loans
Now that we have the basics out of the way, here are the three points of difference between a secured loan and an unsecured loan:
As discussed in the overview, secured loans require collateral while unsecured loans do not. Secured loans are supported by the asset that you own, while unsecured loans require no security to set up.
2. Variances in interest rates
Secured loans are usually offered with lower interest rates compared to unsecured loans. This is because a secured loan carries less risk to lenders due to the collateral. Secured loans sound appealing to people who own a car or a house that they can use as security.
Meanwhile, the unsecured variant caters to people who may not have high-value assets but still have good financial standing. Young adults fall under this category.
3. Limits and restrictions on loan usage
Unsecured loans allow you to use the money for pretty much whatever purpose you choose, while a secured loan has stricter spending restrictions. For instance, if you took out a personal loan to purchase a car, the lender may require you to use the total loan amount to pay for the cost of the vehicle.
If you need an emergency personal loan, you can apply for an overdraft. This kind of loan grants you a specific amount of money to be “overdrawn” on your account balance. This kind of personal loan is easy to set up. It is also convenient in the sense that you can easily cover financial emergencies or expected payments leaving your account.
An overdraft only requires you to pay interest on what you use throughout the month. Take note that there are usually caps on how much you can borrow. Overdrafts also have higher interest rates than a standard personal loan.
Line of Credit
This kind of loan sets a pre-agreed borrowing limit that can be used at any time. Line of credit allows you to access funds as—and when—you need them, which makes it a flexible option. This type of loan is similar to a credit card. You can use it for making fast purchases that you can repay quickly.
Now that you know everything you need to know about loans you can now make an informed decision on whether you need to apply for a personal loan and what kind of personal loan is best suited to your situation. While the cost of living may have made some things unattainable in your current financial situation, it pays to know that you have options.
The opinions expressed in the Blog are for general informational and entertainment purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific investment product. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice.