Why Take Out A Personal Loan?
Growing up, we were often encouraged to scrimp and save as much as we can, and to only spend money that is ours. However, the reality is that most of us will have to take out a loan or two during our lives – whether it be a mortgage to purchase a home, or a credit card to pay off some big-ticket items. Even the most disciplined saver may encounter an emergency in their life that they simply can’t pay upfront.
If you find yourself in a situation where you need to borrow money, you’ll find that there are quite a few options available. One common option is a personal loan: a fixed amount of money that you repay in instalments over an agreed upon period. Personal loans are a great option for borrowing money and can be used for a wide range of purposes, from consolidating debt to a new car and much more.
Personal loans versus a credit card
Both credit cards and personal loans are viable ways to borrow money, but they work differently, and one may suit your personal circumstances better than the other.
Essentially, when you apply for a credit card, you can continue spending money using the card until you reach its limit. In Australia, the average credit limit comes in at just under $10,000 – meaning that, provided you repay the card at a steady rate, you will have a constant source of credit on your hands. This can be useful if you need to establish a line of credit, or if you want to take advantage of interest-free periods and your card’s points system.
However, where credit cards tend to trip borrowers up is with interest. In fact, credit card interest rates are usually quite high when compared to personal loans, averaging at 17 per cent for credit cards and 8 per cent for personal loans, although the latter can vary widely from lender to lender. This means that, when you take into account credit card fees and interest rates, a personal loan can be a more affordable option. Personal loans also allow you to repay your loan over a long period of time (on average 1-7 years) with a fixed repayment amount, making them easy to manage, and once you’ve spent your personal loan, that’s it: you can’t spend any more. This is great if you’re the sort of person that doesn’t trust yourself with a credit card!
A personal loan can help you consolidate debt
If you have a number of outstanding debts to your name, a personal loan can be a great way to consolidate debt – that is, roll all of your repayments into a single lump sum, which you can then pay off at a new (and hopefully improved) interest rate. When you’re making just a single repayment each month, it’s much easier to keep track of your expenses and you’re less likely to miss a repayment and receive a dishonour fee (or a mark on your credit file). And because personal loans have a much lower interest rate than credit cards, they’re a great way to clear credit card debt quickly and save money over time.
Personal loans are more affordable than payday loans
Again, personal loans have an advantage over payday loans when it comes to the amount that can be borrowed, interest rates and fees, with many lenders requiring a fee of 20 per cent of the amount borrowed. Larger amounts can usually be borrowed over longer terms via personal loans as well. Payday loans also come with a fast repayment period, usually between two and four weeks. This means that, if you’re already struggling financially, you may be under additional stress while attempting to repay your payday loan. On the other hand, a personal loan eases the financial burden by allowing you to spread the payments out over months or years (but we always suggest that you pay off any loan as soon as you can, in order to avoid paying interest over an extended period of time).
Doing some small renos? A personal loan can be cheaper and less risky than a home equity loan
If you’re looking to do some smaller renovations around your home, but don’t have the necessary funds at your disposal, you may be tempted to look into home equity loans. However, using a personal loan can help you fund home improvement projects in a cheaper way, without using your home as collateral. For example, borrowing $10,000 for home renos can work out to be cheaper with a personal loan over a short term (5-7 years), rather than increasing your much larger home loan and paying it off over a longer period (up to 30 years).
Personal loans can help you when an emergency strikes
One of the top reasons that people tend to take out a personal loan is when they’re faced with an unexpected emergency, whether it be the breakdown of a car, a fridge that stops working, or a sudden trip to the vet clinic. The reason that personal loans can be beneficial in this situation is due to their approval turnaround time – many can be approved in less than 24 hours, and money will be deposited into the borrower’s account soon after.
Personal loans are a great option for vehicle financing
Large expenses such as a new car are rarely paid for upfront – instead, a personal loan can help you get a new vehicle in your garage without depleting your hard-earned savings. With more affordable electric vehicles becoming available in Australia, it could be the right time to do your bit for the planet.
Weddings and vacations can be covered by a personal loan. According to Moneysmart, the average Australian wedding cost around $36,000 in 2020 – that’s a big chunk of savings for just about any couple. Rather than save up the full amount and postpone your wedding for years, why not take out a personal loan to help you celebrate sooner? The same can be said for holidays. International trips may return once pandemic travel restrictions allow, but there are also plenty of great destinations to discover domestically. If you’re comfortable paying off a loan, you can really enjoy yourself on a dream Aussie or New Zealand holiday sooner rather than later.
Expand your education with a personal loan
While Australia has an excellent student loan system in place, not every course is covered by HECS-HELP, and not everybody qualifies. This is where a personal loan can help. If you want to expand your education to advance your career, a personal loan can help cover the cost of course fees, textbooks and more, all with repayments that are suitable for students working a part-time job.