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Make sense of it all with these Personal Loan hints & tips.

Personal Loans - General Information

Personal Loan minimum repayments

Should you get a secured or unsecured personal loan?

Should you get a fixed or variable rate?

Personal Loans - General Information

Personal loans are probably the most basic of financial products. Consumers borrow a specific amount of money they need then repay the debt with interest in equal payments over an agreed term. The money borrowed can generally be used for any legal purpose such as debt consolidation, home renovations, school fees, paying for a vacation or buying a car.

Personal loans offer the general advantages of being cheaper than the closest alternative (credit cards) and providing the discipline of a repayment schedule.

Personal Loan minimum repayments

As explained before, personal loans have a set repayment schedule. Many personal loans however allow the borrower to make extra repayments. Every dollar you repay above the required repayment shortens the life of the loan as well as the overall cost. Table 1 and Chart 1 both show the effect of making regular extra repayments on a $10,000 personal loan.

TABLE 1

CHART 1

Questions to ask your lender

What is the interest rate?
How can I qualify for a lower rate?
Are there any application or ongoing fees?
Is the interest rate Fixed or Variable?
Can I get pre-approval for the loan?
How long does pre-approval last?
Can I make extra repayments or Lump Sum Repayments?
Is there a penalty for paying off the loan early?
How can I check how much I have owing?
How can I make my repayments?

Should you get a secured or unsecured loan?

Personal loans and can either be secured or unsecured. A loan can be secured by a bill of sale or lien over an asset like a term deposit. Secured loans are usually cheaper than unsecured loans because the lender has the right to claim the asset used as security in the event that you default on the loan.

Unsecured loans on the other hand are collateral free and are therefore more expensive. Since the lender has no security in the event of a default the loan is usually perceived to be more risky.

Should you get a fixed or variable loan?

The interest rate on a personal loan can either be fixed for a specific term or variable. Both types of loans have advantages and disadvantages but both can be used to suit the preferences of different types of borrowers.

Advantages of a fixed rate

Having a fixed rate loan guarantees that your repayments will stay the same for the fixed period.
This means that your loan is insulated from interest rate movements by the Reserve Bank.
Having stable repayments means you can prepare a more reliable personal budget for the long term.

Disadvantages of a fixed rate

One of the drawbacks of fixing your loan is that you might have restrictions of how much extra repayments you can make. Not being able to make extra repayments means you cant pay off the debt early.
If you wish to pay off the loan early you might have to pay an early repayment penalty.
Fixed rate loans might be less desirable during periods of falling interest rates especially if variable rates fall below the fixed rate leaving you stuck with higher repayments.

Advantages of a variable rate

Variable interest rate loans move with the Reserve Bank Interest rate movements. If the Reserve Bank lowers interest rates, you can expect the required repayments of your variable rate loan to decrease as well.
Variable rate loans are more flexible and allow extra repayments. They may also allow early repayment without penalties.
Consistenly making additional repayments will shorten the life and therefore the overall cost of the loan.

Disadvantages of a variable rate

Variable interest rate loans move with the Reserve Bank Interest rate movements. If the Reserve Bank increases interest rates, you can expect the required repayments of your variable rate loan to increase as well.
Not having repayments that are set for an extended period can make it difficult for borrowers to budget their repayments.