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What are personal loans?
A personal loan is a small loan from a lender to a borrower, to be used for a personal reason. There are usually two purposes for taking out this type of loan:
Personal loans are separate and different to loans for property, businesses and investments.
Part of the reason personal loans are still used instead of credit cards is that they can tend to have a lower interest rate, and can be approved or rejected by financial institutions quickly, often in 1 – 3 banking days.
Before you take on additional financial obligations like a personal loan, you should always get some good financial advice. You need to work out a solid budget and know that you can afford to add monthly loan repayments to that budget. 79% of Kiwis surveyed by Canstar Blue in 2015 said, “I feel that I am good at managing my own finances.” But in life, unexpected things happen to the best of us – don’t let yourself fall into debt because your budget was stretched too tight.
Kiwis who have fallen into debt might decide to take out a personal loan to consolidate those debts, so that they only have to meet one set of monthly repayments and can create a budget to pay off their debt. Personal loans tend to charge lower interest rates than most credit cards, and they have a defined timeframe in which you have to pay off the debt, forcing you to be disciplined. Taking out a personal loan is not a decision anyone should make lightly, but sometimes it could be a good way to pay off your debts.
Different types of personal loans:
Personal loans can be fixed rate or floating, which refers to the interest rate that applies to the loan.
Personal loans can also be secured or unsecured.
1. Secured loans:
A secured loan is where you use something that you own, like your car, as ‘security’ against your debt. This means if you weren’t able to repay the personal loan, the lender may be able to sell your security item instead to recover the money that they loaned to you. View secured personal loans on our website.
2. Unsecured loans:
With an unsecured loan, the lender agrees to lend you money without you making a promise of security. Because they are relying solely on your income to repay the debt, you have to provide proof of your income when you apply. If you weren’t able to repay an unsecured personal loan, the lender might still take you to court, but the lender faces a higher risk of not getting their loaned money back. Interest rates on unsecured personal loans tend to be higher than the rate on unsecured loans on average, because the lender faces that increased risk. View unsecured personal loans on our website.
A personal overdraft is one type of unsecured personal loan. An overdraft feature attached to your savings or debit bank account lets you spend more money than you have, up to an approved limit. This limit is usually quite small, around $500. Interest is charged on any amount you spend in the overdraft. When you use the overdraft, a monthly fee is charged, and when the overdraft is inactive, you only pay the normal fees for your savings or debit account.
How much will a personal loan cost?
How much you pay for a personal loan depends on how much you borrow, how long you take to pay it off, and the interest rate that applies. Interest rates can vary from 10.50% (at time of writing) up to nearly 14% for secured loans, and 12.65% to nearly 18% for unsecured loans.
In 2014, CANSTAR’s research team provided the example of average interest rates of 16% charged on a $10,000 personal loan over 10 years. If the monthly repayments were $168, the total repayments over 10 years would be around $20,100. If the monthly repayments were higher at $217, the total paid would be just $15,600.
How long and how much can you take out a personal loan for?
Personal loans can be taken out for as short as 3 months or as long as 20 years in some cases. While secured personal loans or car loans can run for a term of up to 20 years, unsecured personal loans generally have a shorter term of 10 years or less because they are riskier for lenders.
Of course, we all hope you pay off any loan you have as soon as you can, and certainly before your loan term ends.
Personal loans can be for amounts up to $100,000, but are usually taken out for smaller amounts.
What is a Student Loan?
A student loan can mean two things, so it’s important we know what we’re talking about. A Student Loan is a personal loan from the government, where a study loan is a type of personal loan you can get from a bank.
The type of loan you take out to cover your study can affect how much you end up paying and how much time you have to pay it back. It’s an important choice that affects your life even after you graduate, so be careful. A government loan could be your best choice, and you would generally only consider taking out a loan from the bank if you weren’t eligible for Student Loan.
Studying in New Zealand is relatively expensive. Depending on which educational institution you attend, you could pay tuition fees alone of $5,000 – $8,000 per year for an undergraduate degree. Medical degrees cost more like $14,000 per year. Postgraduate degrees cost $7,000 – $13,000 per year, and specialist Masters programs could cost you $16,000 – $34,000 per year.
(All prices listed in NZD.)
1. Government Student Loan Scheme:
The Student Loan Scheme is where you borrow money from the government to pay for either:
a) Course tuition fees – covers all yearly fees
b) Course-related costs such as equipment, uniforms and textbooks – a lump sum of up to $1,000 a year
c) Living costs while studying – covers up to $176 a week
Student Loan is an unsecured loan, but it isn’t means tested, so you can get a loan even if you and your parents earn plenty of money. However, if you are using Student Loan for living expenses, then you can’t also receive a Student Allowance for the same thing. So it makes sense to have a Student Loan for course fees or course-related costs, and use Student Allowance for your living costs.
Find out if you are eligible for a Student Loan or Student Allowance on the government’s StudyLink website:
There is a lifetime limit on the Student Loan Scheme. You can get a student loan for up to seven years of full-time study, or EFTS (equivalent full-time student), which equals about seven or eight years of full-time study.
2. Personal loan for a student:
A ‘student loan’ can also mean a personal loan for a small amount of $1,000, provided to a student by a bank or other lender. It can also be called a study loan or graduate loan. Student loans generally have fewer extra fees than other personal loans; for example, they often do not charge a loan approval fee.
What is a Payday Loan?
A payday loan is a small, short-term, unsecured loan, where the repayments coincide with the borrower’s payday – as the name implies. Payday loans typically have a high interest rate and are for small amounts.
Payday loans are usually used by consumers who are hit by a sudden and unexpected expense that they can’t pay on their own. Payday loans are not a sensible long-term solution for getting out of debt, given their high interest rate and short timeframe.
A staggering 40% of Kiwis surveyed by Canstar Blue NZ in 2015 said they live from payday to payday, and 9% said they have considered a payday loan. This figure was even more noticeable in Gen Y, as 50% said they live from payday to payday, and 17% said they had considered a payday loan. This is an improvement on 2014, when 42% of Kiwis overall, 46% of women, and 59% of young New Zealanders told us they were living on the edge.
Beware of loan sharks that offer payday loans that charge interest by the week rather than by the month. They’ll sell you a loan by telling you the repayments are so many dollars per week or per month, but this can hide the fact that the annual interest rate is astronomical. The average annual interest rates in our database for legitimate loans was around 14% for secured loans and 18% for unsecured loans in 2014.
What is a Peer to Peer Loan?
Peer to peer (P2P) loans are a type of loan where people borrow money directly from investors instead of applying for a loan from a big bank.
P2P lending can be an attractive option because lenders may not charge as many fees as banks do. Borrowers who have a great credit rating can turn to P2P lending if they don’t get the low interest rate they deserve from the big banks. P2P lenders are legally required to give borrowers the same disclosure statement and client agreement as banks and other lenders.
P2P lending has been a well-established practice in the UK since 2005 and in the US since 2006, but has only recently arrived in New Zealand. In late 2014, Harmoney was the first financial institution in New Zealand to be licensed for P2P lending, with a low minimum loan amount of $500, and average interest rates of 9.99%. Other licensed P2P lenders are listed on the New Zealand Financial Markets Authority register. At the time of writing, Harmoney, LendMe, and Squirrel Money were licensed.
How to apply for a personal loan:
If you want a personal loan that’s good for you, not just your bank, you need to know what you need before you even start sussing out where you could apply for a loan. Only 9% of Kiwis surveyed by Canstar Blue NZ in 2015 had taken out a personal loan with their main banking institution. So New Zealanders overall are pretty clever about shopping around for the best rate for a loan, and not just sticking with whatever bank they have their savings in.
There are a number of important things you need to think about when deciding what type of loan you need:
1. Choose the amount of money you want to borrow:
You should write out a budget that includes absolutely everything you spend every week, month, and year. That includes your rent or mortgage payments, the petrol in your car, the food on your table, your electricity, gas, and water bills, medical expenses, school expenses for your children, andthe monthly repayments you want to make on a personal loan. You should also try to think ahead for any future medical expenses or unpaid leave you might have to take out of that budget.
60% of Kiwis we surveyed in 2015 said they stick to a budget, which is great. But 10% said they find it difficult to budget because they get paid monthly, and this was even higher for Gen Y at 16%. A budget is even more important if you only get paid once a month, because you have to plan ahead a little further.
Don’t forget that a loan costs more than just the repayments – there are also fees and other charges. Application approval fees to establish your loan can be around $250, and then there are the monthly fees, and even more fees if you have a car loan.
Some banks have a minimum amount you can take out a loan for, such as $3,000, and many will offer you a larger loan amount than you actually need. Stick to the amount you want to borrow. You made a budget for a certain amount, and you would just end up paying more interest on a bigger loan.
Sorted.org.nz is a free financial help website with a great range of budgeting calculators you could use to when making your budget:
If you’ve chosen a personal loan to consolidate your debt, cut up the credit cards that put you in debt and close the accounts to those cards.
2. Choose the length of time (term) to repay it:
A shorter loan costs higher monthly repayments. A longer loan will cost you more in interest payments over the life of the loan. So you should choose the shortest loan term that you know you can comfortably afford, without making things too tight.
Some lenders may charge an early repayment fee on personal loans, so look for one that doesn’t. If you know they do charge a fee, get in touch when you’re ready to repay, and find out how much the fee will cost.
3. Choose a secured or unsecured loan:
Secured loans give you a lower interest rate (14% average in 2014) but you risk losing the property you put up as security if you don’t make all the repayments. Unsecured loans have higher interest rates (18% average in 2014) so you might end up paying more in interest over the life of the loan.
Make sure you never miss a payment, no matter what the interest rate is. A missed payment is a serious default, so it puts a black mark on your credit rating that makes it harder to get future credit cards or loans.
4. Choose a fixed interest rate or floating interest rate:
A fixed interest rate gives you the certainty of knowing what your repayments will be, but there’s the risk that if the Reserve Bank cash rate goes down, bringing interest rates with it, you’ll be ‘stuck’ on your current rate and end up paying more. A floating interest rate goes up and down when the Reserve Bank cash rate changes.
Be wary of introductory offers that start with a low interest rate but switch to a higher rate after the ‘honeymoon’ period – you want to pay a low amount of interest as long as your loan lasts. Also check out cashback offers carefully, to make sure they’re not hiding higher account-keeping fees.
5. Check your credit rating:
Your credit rating is a measure of your trustworthiness to repay a loan, and lenders use it to decide whether to approve or reject loan applications. You should check out your credit report before you apply for a loan, to find out your credit rating and avoid nasty surprises. Otherwise if you apply and are rejected, a big black mark is added to your credit report against future applications. Find out what information goes in a credit report here or visit the government’s Consumer Rights page about credit reports.
There are three government-approved credit agencies where you can get a free copy of your credit report:
If you have a less-than-perfect credit report, find out our tips for improving your credit situation.
6. Have your paperwork ready to go:
Make the process smooth and easy by gathering everything you need before you apply. A lender will want you to provide:
7. Shop around:
Look for a loan that suits your budget and provides great value for money.Compare personal loans on the CANSTAR website or read our most recentpersonal loan star ratings report for more information. You can alsocompare levels of customer satisfaction with banks on Canstar Blue NZ.
Why would you get a personal loan?
What can you take out a personal loan to finance?
You can use a personal loan to pay for just about anything that’s “personal”:
Please note that these are a general explanation of the meaning of terms used in relation to personal loans.
Policy wording may use different terms and you should read the terms and conditions of the relevant policy to understand the inclusions and exclusions of that policy. You cannot rely on these terms to the part of any policy you may purchase. You should refer to the product disclosure statement.
Account-keeping fee / Administration fee: A monthly account-keeping fee that is charged by the lender to cover the administration cost of maintaining the loan.
Annual Percentage Rate: A percentage figure that represents the total charge for the loan, including fees and interest, so that you can compare rates across the market. (We’ve done the hard work for you on our comparison website.)
Approval fee / Application fee: A fee charged by the lender to process your loan application and approval. Covers the cost of document searches, valuations of any security assets, and processing the loan.
Asset: Something you own or something you own an interest in, which is worth money if you sell it.
Automatic transfer: A system that automatically sends money from one bank account into a different account at a certain date to pay your bills or payments when they are due.
Balance: The amount remaining to be paid off your loan. The closing balance is calculated at the end of a month or statement period, after all repayments have been taken into account. The opening balance is the closing balance of the month before.
Bankruptcy: This is when a person’s debt problems become so serious that they cannot pay off their debt or pay other bills that are coming in. The person can file for bankruptcy with a court, which means they are declared ‘bankrupt’ and any assets or savings they have are sold to pay off their debts. This only includes the person’s assets, not their partner’s. Someone who is bankrupt usually cannot be approved for credit or loans. After 3 years, a person is discharged (released) from bankruptcy, or they can apply to the court to be discharged sooner. They will still have a black mark on their credit report.
Basis points: A basis point is equal to 0.01% interest. For example, 50 basis points is an interest rate of 0.50%.
Borrower: A person borrowing money from a financial institution. Also known as a debtor.
Car loan: A personal loan designed for buying a car. Also known as a vehicle loan.
Cash advance: Withdrawing money from a line of credit such as a personal loan. Usually incurs additional fees or a higher rate of interest.
Caveat emptor: Latin for “let the buyer beware”.
Comparison rate: A figure that represents the total annual cost of the loan, including interest rates, payments, and fees and charges.
Consumption loan debt: Personal loan debt used to purchase things that are used immediately or depreciate from the time they are bought. This includes goods and services such as holidays, hire purchase, cosmetic surgery, furniture, furnishings.
Credit rating: A number that represents the credit-worthiness of an individual or corporation, based on their positive and negative borrowing and repayment history. Your credit rating is affected by whether you pay your bills on time, your current level of debt, the types of credit and loans you have, and the length of your credit history. Your credit rating and credit report are used by lenders when deciding whether or not to lend to you. Find out how to check your credit rating here.
Credit report or credit history: A report from a credit agency that contains a history of your previous loan and bill payments. Banks, lenders, creditors and financial institutions use this report to determine how likely you are to repay a future debt and whether or not they should lend money to you. Lenders can record a default on your file if you make loan repayments late. Every application for finance that you make is recorded on your file showing the lender you applied to, the type of finance, the amount and the date. Find out more about what is included in your credit report here.
Creditor: A person or organisation to whom you owe money, usually a financial institution. Also known as a lender.
Current Rate: The interest rate advertised by institutions, not including fees, discounts and special offers.
Debt: Money owed by one person (the debtor) to another person or financial institution (the creditor). Debt requires that there is a contract for the debtor to pay back the money. A debt is also known as a liability.
Debt consolidation or consolidation loan: When you take out one loan to pay off multiple other loans or credit card debts, so that it is more affordable and you only have to make one monthly repayment instead of many. A debt consolidation loan should have a lower, fixed interest rate.
Debtor: A person who takes out a loan. Also known as a borrower (above).
Default: When a cardholder fails to make the minimum required repayment on their loan. Defaults are recorded in your credit report and have a bad effect on your credit rating.
Drawdown: When a lender ‘draws down’ the loan from their funds into your bank account and the borrower uses the money. Interest is usually charged from the day the loan funds are transferred to the borrower’s bank account.
Drawdown Date: The date on which you first use the money loaned to you.
Equity: When you borrow money to buy an asset, equity is the difference between the value of the asset and how much you have left to pay off. For example, if an owner buys a car with a loan for $10,000 and has repaid $3,000 so far, the owner has equity of $7,000 on the car. Also known as a residual claim to ownership.
Extra repayments: Extra payments that you choose to make to your loan on top of the minimum required repayments. These make you pay off your loan faster and pay less in interest. Also known as additional repayments.
Fixed rate: A loan where the interest rate does not change during the term of the loan or during a specific time period, regardless of whether the Reserve Bank official cash rate goes up or down.
Floating rate: An interest rate that changes when the official cash rate set by the Reserve Bank of New Zealand goes up or down. Floating rate loans change regularly in interest rate, so you will pay a different amount as your repayment each month.
Guarantee: A promise you make to pay someone else’s loan if they fail to meet their required repayments or break their loan contract in another way. Also known as an undertaking.
Interest in advance: Interest payments are charged at the beginning of a period. Usually only applies to fixed interest loans.
Interest in arrears: Interest payments are charged at the end of a period.
Interest rate: The rate at which your outstanding loan balance increases per month if you don’t pay it off.
Lender: A financial institution offering a loan. Also known as a creditor because they are offering an amount of credit.
Loan: Money borrowed by one person from another person or financial institution. Interest is charged on the amount until it is fully repaid, and it must be repaid within a set timeframe.
Maximum loan amount: The maximum amount of money you can borrow from the lender in one loan.
Minimum interest charge: The minimum amount of interest the bank will charge on your loan. For example, if your total interest charge was $0.75 but the bank’s minimum interest charge was $1.00, you would be charged $1.00.
Minimum loan amount: The minimum amount the lender requires you to borrow from them in a loan.
Minimum repayment: The minimum amount of money including interest and a repayment of part of your loan, which your bank requires you to pay for that month.
Ombudsman: If you have a dispute with your bank and haven’t been able to resolve it through the bank’s complaints resolution process, you can contact the New Zealand Banking Ombudsman Scheme, or the Insurance & Financial Services Ombudsman Scheme (IFSO Scheme), formerly known as the Insurance & Savings Ombudsman. These are free and independent services that help people resolve disputes with their bank or other financial institution about a loan.
Reserve Bank cash rate: The overnight interest rate that the Reserve Bank of New Zealand offers financial institutions for their daily transactions with other banks. This cash rate influences the interest rate that banks put on their customers’ loans.
Redraw: A feature of some loans where the borrower can withdraw funds they’ve already paid, if they are far enough ahead on loan repayments.
Refinancing: Paying off an existing loan by setting up a new loan.
Repayment holiday: A borrower who is ahead on their required repayments can apply to have a ‘holiday’ where they don’t have to make payments to their loan.
Secured loan: A loan where the borrower provides an asset as ‘security’ (insurance) for their debt. Secured loans usually have lower interest rates than unsecured loans because there is a lower risk to the bank of losing their money.
Student Loan: A loan taken out with the government in order to pay for tertiary study.
Unsecured loan: A loan where the borrower does not provide any asset as security for their debt. Because the loan is not ‘insured’, it is a higher risk, so lenders charge higher interest rates they do for secured loans.
Are you debt-stressed?
The 2015 banking survey by Canstar Blue NZ of 2,316 New Zealanders who have one or more accounts or products with a bank, found that 33% of Kiwis find dealing with money stressful and overwhelming. This was especially true for Gen Y at 47%, and women and Gen X at 40%. 43% of Kiwis said thinking too much about their long-term financial future makes them feel uncomfortable, especially for Gen Y at 57% and women at 49%.
Kiwis can risk falling into debt by having multiple credit cards and trying to own everything they want without saving up for it. Currently, New Zealand is has almost $6.2 billion of credit card debt, and we’re paying a scary average interest rate of 18.6% on that debt.
Are you in debt to a stressful point? Jeff Rose, author of the book Soldier of Finance, lists the following signs you might be stressed by debt:
If you’re feeling the pinch of debt stress, don’t panic. Start by checking out the tips for repaying debt on the Sorted.org.nz ‘Shrink Your Dumb Debt’ website. If you’re being chased by debt collectors, please visit the Consumer Affairs NZ website for information about your rights.
Paying off your debt:
If you know your debt is out of control, take control of it now using the following steps.
Step 1: Negotiate with your lender.
The first step should always be to try to negotiate with your loan provider. Ask them if you can make smaller monthly repayments or pay a lower interest rate, and explain that your budget is currently struggling to repay your debt. If they refuse and you think they are being unfair, you should contact New Zealand’s free dispute resolution schemes for finance and banking:
If you don’t feel confident to talk to your lender on your own, you can contact a free debt management service such as Christians Against Poverty NewZealand.
Step 2: Create a budget.
Face up to the problem: you are in debt. List all of the amounts of money you owe, from credit cards to personal loans to bills you haven’t paid yet, and the interest rates you’re paying on those amounts. Add it up into one lump sum you need to pay off.
Sit down and write out a budget listing all of your weekly expenses. This is the only way to work out how much you can afford to repay on your debts each month. Try using the Federation of Family Budgeting Services freebudgeting resources, including the Budget Worksheet and the Debt Schedule. You might also want to read their Stretching Your Dollars booklet.
You can also check out the information on the government’s Family Budgeting website.
Step 3: Consolidate your debt.
Check out what interest rates are on offer and put the whole debt into one place. Whether that means putting the debt onto a personal loan, a low rate credit card, or a balance transfer, look for a very low interest rate.
If you choose to use a personal loan, you’ll want a fixed rate loan so you know how much you need to budget to make your monthly repayments. You’ll probably want a longer timeframe loan, so that those repayments are low enough to afford – but avoid the higher interest rate loans. Remember to check for early repayment fees.
Step 4: Protect your new budget.
Switch to cash. Cut up your credit cards and close the accounts to them, to avoid impulse spending that is not in your budget.
Watch what you actually spend your money on and check that you’re following the budget you set. You might want to use a Money Tracking Diary like this one from Sorted.org.nz.
Make extra repayments as often as you can, so that you’re covered if things are particularly tight one month and you need to make a smaller payment. Nobody wants to pay a missed payment fee.
Paying off your debt is more important than having savings. Also, don’t invest in anything at all, or you risk losing more money.
Be patient. It will take time to pay off your debt completely, but if you stick to the budget and don’t go on any spending sprees, it will be gone. You will be free.
Step 5: Ask for help if you need it.
If you’re eligible for government welfare payments through Work and Income, get in touch right away.
One free organisation that helps you consolidate your debt and deals with creditors and debt collectors for you, is Christians Against Poverty NewZealand. You can call their free helpline on 0508 227 111 or even shoot them an email.
Don’t be fooled by other businesses offering “debt help” services. Most of them are just debt consolidation companies, and what’s worse, they charge you a fee for the service. You can get the same help – and more – for free
How we rate personal loans
In 2014, CANSTAR analysed 19 Personal Loans from 9 financial institutions in New Zealand. All ratings are re-assessed every year.
We assess three categories of personal loans:
We compare personal loans within those three categories according to characteristics including the following:
Personal loan providers we rate
The personal loan providers we rate are listed on our comparison website. The following list is current as at August 2015:
Our Ratings & Guides
+ Articles and Guides
Choosing a personal loan:
Improving your credit rating:
Managing loan debt: