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Seizing the moment: A guide to personal loans

13 February 2020

Seizing the moment: A guide to personal loans

You've done it. You've made the decision. You're going to book that holiday you've been planning since last year, finally fix up the kitchen, or book the car in at the mechanic (that clunking noise is still there).

The good news is if you don't have the cash right now you can still make it happen.

Personal loans are one option to help you make a purchase without having to save for it first. They can be used for a wide range of purposes, and as the cash is usually provided in a lump sum payment they're well suited to larger purchases.

Personal loans can also be handy if you're looking to get your bills under control. A debt consolidation loan can help remove the pressure of multiple bills by rolling individual debts into one single loan, and can often provide lower overall interest payments.

So how much can you borrow? And how do you know what personal loan is right for you?

Here are a few things to consider before you seize the moment.

The amount you can borrow is generally based on your income, as well as other factors such as existing financial commitments (such as other loans and credit cards) and credit history (your past loan and repayment history).Your financial provider will ultimately decide how much you can borrow.  But if you'd like to get a rough idea of how much you could borrow you can check out our borrowing power calculator

Interest rates

Fixed versus variable rates

Like all loans, with a personal loan you'll pay interest on the outstanding loan balance.   If you choose a fixed rate, the interest rate will stay the same for the full term of the loan. With a variable rate, the interest rate may move up or down over the life of the loan.

Both have pros and cons. With fixed rates you have peace of mind knowing that your repayments will not change.  With a variable rate you could benefit from lower repayments if interest rates go down, however you also need to allow for the possibility of interest rate rises.

Comparison rates

Comparison rates can be useful for comparing the overall cost of different loans. It takes into account upfront and ongoing costs, such as establishment and monthly account keeping fees. It represents this as a single percentage figure based on a defined loan term and loan amount.

While they're a useful tool, there are some points you need to keep in mind about comparison rates. There isn't a standardised loan term among Australia's financial institutions, so when looking at comparison rates on different products you should make sure they're for the same time period.

And some loans offer additional benefits (like the ability to make extra repayments) that aren't included in comparison rate calculations.

Secured versus unsecured

You can also choose between a secured or unsecured personal loan.

With a secured loan you offer an asset, such as your car, as security for the loan. Secured loans generally have a lower interest rate, however if you're unable to meet your repayments your financial provider can repossess the asset.

With an unsecured loan you do not need to have an asset to offer as security, however you are usually charged a higher interest rate.

Loan term

The loan term is the set period of time to repay your personal loan. Loan periods are usually stated in months, such as 12, 24 and 36.

A longer loan term will reduce your monthly repayments, but will increase the amount of interest you pay over the life of the loan compared to a shorter loan term.

When comparing loan options, make sure that the term of the loan is the same for each loan you are comparing (for example, compare a two-year loan with other two-year loans).

Fees and charges

Before you sign on the dotted line, it's a good idea to look at any fees and charges that may be applicable.

Some personal loans come with loan application and monthly account keeping fees. And so while some loans may have a lower interest rate, they may end up costing you more because of higher fees. The comparison rate can help you to compare total loan costs.

You may also want to consider whether there are any penalties for making extra repayments or for paying off the loan earlier than the agreed term. The more payments you can make, the quicker you can pay off your loan.

To apply for a personal loan you'll need to provide proof of your identity and income. As a guide, it helps to have these details ready before you apply:

  • Your employment and income details (e.g. payslips)
  • Your asset details (e.g. any assets like house, vehicle, investments, etc.)
  • Your Australian driver's licence details
  • Your Medicare details
  • Your passport details
  • Any amount owing on loans

For more information visit greatsouthernbank.com.au, drop in to one our branches or call 133 282.

Credit Union Australia Limited ABN 44 087 650 959. Australian credit licence 238317. The information contained in this guide (which is provided for your information and use) and any tools provided (which are for illustrative purposes only) and any results they give, should not be taken as constituting personal advice. Whilst we have made every effort to ensure that such information and tools are correct and complete, we have relied on third party providers and there can be mistakes made, so we do not guarantee the correctness or completeness or appropriateness to you of any of the information provided or linked on this guide or the tools (or any calculation) or tables in this guide. We recommend that you seek independent advice before acting upon any information provided or linked on this guide.

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