There is no one-size-fits-all when it comes to personal loans. It really comes down to finding the best fit for you. So how can you decide which is right for you?
First, you need to make a few key decisions. Planning and considering your situation upfront will help when comparing what personal loan products are available that might really fit your needs, and offer the best value.
1. Decide how much you really need
To decide how much you need to borrow (loan amount), do some research and budgeting to work out how much (approximately) you are going to need for that car, holiday or wedding. In the case of debt consolidation, it helps to know exactly which debts you are consolidating and how much money you have outstanding. It’s smart to only borrow what you really need, rather than all that may be offered to you by a lender.
Remember, when you borrow money to pay for something, the actual ‘cost’ of that item becomes much higher when you factor in the cost of the loan. For example, if you borrow $20,000 to buy a car with a 5 year Unsecured Loan and a fixed interest rate of 12.50%, once you factor in interest and fees that car may actually cost you around $27,417.
2. Decide how much you can afford to repay
Look at your everyday budget, or create one, to see how much you can realistically afford to put towards repayments. It’s always good to give yourself a buffer; failure to make a repayment at any time can cost you a lot. Are you expecting any major expenses or changes in income in the next few years, perhaps changing where or how much you work or perhaps hoping to have a baby? Be sure to build this in.
Whether you receive your income weekly, fortnightly or monthly, you need to know how much you have leftover at the end of each pay period and how this will align with your repayments. This is to ensure there are no missed payment surprises. It may be worth opening a separate bank account for your repayments and transferring these funds in on payday so you are never caught out
3. Decide how long you will need to repay
Divide the loan amount by your planned monthly repayment to get a ballpark amount of time you’ll need to repay the loan. For example, Jo wanted to borrow $24,000 to pay for his upcoming wedding. Based on his salary and existing expenses, he thought $120 per week / $480 per month would be an affordable repayment. This would be $5,760 per year, meaning in 5 years he’d have paid $28,800— roughly the full amount, accounting for interest and charges.
A longer-term loan might seem attractive as it means lower monthly repayments, however, the overall (lifetime) cost of the loan is significantly higher because you’ll pay more in interest, and potential fees. That being said, provided you look for a loan with flexible repayments, you’ll be able to take advantage of any future increases in salary that may allow you to pay down your loan faster without penalty.
4. Decide between a secured or unsecured loan
Do you have an asset that you are willing, or able, to put up as security against the loan? Perhaps property, or the new car you’re planning to purchase? If you are confident in your ability to repay the loan, then a secured loan will get you a better rate and may unlock access to greater funds. Be aware however that your asset will be at risk if you can’t make the repayments.
5. Get your rate estimates and compare your offers
Now you know roughly how much you need to borrow, what you can afford to repay, and how long you’ll need to repay your loan. Next you can start to plug these values directly into lender or comparison sites to get an estimate of your personalised interest rate and repayments.
Experiment with different combinations, such as different loan terms or repayment amounts, and match them against your needs. Need more help deciding? There are many third party agencies (that don’t sell loans) that rate and compare a broad range of loans.
Canstar is one of the most established financial comparison sites, and they’ve been comparing products without bias since 1992. They release annual star ratings for a range of personal loans from many providers. To do this, Canstar comprehensively and rigorously examines a broad range of loans available across Australia. To come up with an overall score, they award points for:
- Price — comparative pricing factoring in interest and fees
- Features — like the complexity of the application, the time involved before settlement, product management, customer service, and loan closure
These are then aggregated and weighted to produce a total score. This means Canstar’s ratings are reputable and transparent, so you can trust the information they provide, but dig deeper if you want to. Other comparison sites can also be useful, however, you should always check around, as some may have a ‘sales’ element — that is they may receive money for the people that visit their website en route to a particular lender.
So if the best rate isn’t being offered, it may not show up on their comparison. They also have ‘promoted’ or ‘featured’ loans, which they are paid to highlight, even if those loans do not truly reflect the best value loans on the market.
Another way to get information on your lender and loan is to read feedback from real, verified customers’ on ProductReview.com.au.
What questions should I ask when comparing?
Here’s a useful checklist to be confident you understand your loan.
- What are the interest rate and the comparison rate?
- How do these rates compare to other loans?
- What are the fees and charges? (e.g. upfront, ongoing, early exit)
- What are the terms and conditions?
- Do the loan term and loan amount fit your needs?
- Can you afford the repayments?
- Are you comfortable with the lender? Have you checked its reputation and accreditation?
Get ready to compare
Taking the time to compare personal loans is worth the effort. Once you have an idea of what type of loan that you’d like, it becomes easier to compare apples with apples. Comparison rates can be a really important tool to compare personal loans.
For example, if a personal loan has an interest rate of 11.35% p.a. and a comparison rate of 13.47% p.a., that means this loan includes a high amount of fees. If the loan has an interest rate of 10.13% p.a. and a comparison rate that is the same, it shows that there aren’t fees included in the loan.
Always make sure you are comparing loans that are like-for-like. That means each product has the same loan term, loan amount and loan type (e.g. secured vs unsecured).
Other factors to consider
Comparison rates are a good starting point, but you still need to decide what will work best for you. The costs involved are a major factor, but once you've shortlisted a few loans with similar costs, there are some other things to check out:
- Are there flexible repayment options? Usually, you can choose between weekly, fortnightly or monthly repayments according to what suits your pay cycle. However, not all lenders offer this. Compare a loan’s conditions and fees around making extra repayments and paying the loan off before the end of the term.
- Can you use the funds for what you need? You can’t always use the borrowed money for whatever you like, particularly if you’re taking out a Secured Loan. For example, if you are taking out a car loan, you’ll only be able to spend the loan funds on a vehicle purchase, and the vehicle needs to be eligible according to the particular lender's criteria (such as new, secondhand, age). Some lenders don’t allow you to take a personal loan for business purposes. Make sure you can use your loan how you need to.
- What are the options for managing the loan? Check and compare how easy the loan will be to manage. The option to manage your account online is often available but not always. Using direct debit for repayments is common, however, if it's not, manually paying is less convenient. It also increases the likelihood of late payments if you aren’t especially disciplined.