5 things to look for in a personal loan

When it comes to funding payment for a big ticket item- and you don’t have the available cash -it helps to know what types of personal debt arrangements are available. The main ones are as follows:

When it comes to finding a personal loan, there are hundreds of products for consumers to choose from. So ” how do you know which product is right for you? While to a certain extent that will depend upon your reason for needing a loan, your asset position and your repayment capacity, there are some universal features that consumers should look for. Five of these include:

The interest rate charged on the loan.

Of course! The interest rate charged on your loan will make a significant difference to the lifetime cost of your loan. Currently on CANSTAR’s database, personal loan interest rates range from a low of 10.50% for a secured personal loan to a high of 18.20% for an unsecured personal loan, with average rates of 13.24% for a secured personal loan and 16.00% for an unsecured personal loan.

The table below outlines the difference in overall cost of a $10,000 loan over 5 years at varying interest rates:

Interest rate Loan amount Term Monthly repayment Total lifetime cost
12.00% $10,000 5 years $222 $13,347
14.00% $10,000 5 years $233 $13,961
16.00% $10,000 5 years $243 $14,591
Does not take into account any other fees or charges

Repayment flexibility.

In addition to the regular repayments, it is useful if a personal loan also allows additional lump-sum or regular repayments. That way, if your finances allow, you have the ability to repay the loan ahead of time. Ensure that you will not be penalized by the financial institution for repaying your loan early.

Competitive fees and charges.

The fees and charges that are applied can make a significant difference to the overall cost of a loan and you will need to balance the interest rate charged plus the other fees and charges to ensure that you choose a competitive product.

Good service.

Can you access your loan details online? Is it easy to make additional repayments? Are your account queries answered promptly and accurately? While borrowers will have varying customer service needs, there are some basics of good service that are universal.

A comfortably short term.

While a longer-term loan might seem like an attractive option because the monthly repayments will be less, it’s important to remember that the longer your loan term, the more expensive that loan will be.

The table below outlines the difference in overall cost of a $10,000 loan at an average unsecured personal loan interest rate of 16%, with a comparative loan term of five, seven and 10 years:

Loan amount Loan term Interest rate Monthly repayment Lifetime cost
$10,000 5 years 16.00% $243 $14,591
$10,000 7 years 16.00% $199 $16,684
$10,000 10 years 16.00% $168 $20,102
Calculation excludes any monthly or annual fees attached to the account.

So choose a loan term that is as short as you can comfortably manage within your cashflow

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