Why compare personal loans?
Personal loans aren't a one-size-fits-all option. Costs, interest rates and features vary greatly between lenders and loans, so it's important to compare your options to find the right loan for your financial needs.
Reasons to compare include:
- Rates and fees vary widely: the interest rate you’re offered is often tied to your credit score, and comparing may stop you from paying an unnecessary premium.
- Protect your credit score: reduce your chance of being rejected for a personal loan (and hurting your credit score) by comparing loans you're more likely to be eligible for before applying.
- The loan with the cheapest interest rate might not be the most cost-effective one: the right combination of features, such as redraw facilities or the ability to make extra repayments, could help you save money over time.
Choosing a loan without properly comparing your options could leave you with repayments that are difficult to manage, or cost you more than necessary over time. You could even end up defaulting on your loan, which could majorly damage your credit score.
How do personal loans work?
Personal loans work in a straightforward way:
- You apply for your loan of choice, supplying the lender with details on your financial situation.
- If you're approved, the lender transfers the loan sum into your designated bank account.
- You then make regular loan repayments, either weekly, fortnightly, or monthly. These repayments go towards both the principal (the original amount borrowed) and interest charged by the lender.
- You may also be charged certain fees, depending on the loan.
- You'll continue making repayments until you've completely repaid the loan amount, plus interest and any fees.
What to consider when applying for a personal loan
Before you apply, it's advisable do your homework and answer these questions:
1 How much can you afford to borrow?
Write a budget that includes all your living expenses. Once you know how much you can comfortably afford in repayments, you'll be able to gauge how much you can afford to borrow.
Don't forget that a loan costs more than just its repayments – there are also other fees and charges. Loan establishment fees can be as much as $380, and there can be additional monthly fees.
Some banks have a minimum amount you can borrow, such as $3000. And you might be offered a larger loan than you need, so stick to the amount you want to borrow.
2 How long do you want your loan repayment period?
A shorter loan comes with higher monthly repayments. A longer loan costs more in interest payments. Choose the shortest loan term that you know you can comfortably afford.
Some lenders charge an early repayment fee. Keep this in mind if you intend to pay off your loan early. Make sure you check the fine print and ask questions before applying, so you are fully aware of the loan's true cost.
3 What type of loan do you want: secured or unsecured?
Secured loans can offer lower interest rates, but you risk losing the property you put up as security if you don't make repayments. Unsecured loans tend to have higher interest rates, so may be more expensive.
Whichever type of loan you chose, if you miss your repayments, it can affect your credit rating. This will make it harder for you to secure loans, including mortgages, in the future.
4 Do you want a fixed 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 interest rates drop significantly, you'll be left paying a higher rate.
Floating rates are usually higher than fixed rates, but do move up and down, meaning you'll pay less if rates drop.
Be wary of introductory offers that start with a low interest rate but switch to a high rate after the introductory period. You should aim to pay a low amount of interest over the entire life of your loan.
Also, check out cashback offers carefully, to make sure they're not hiding higher account-keeping fees.
5 Do you know your credit score?
Your credit score is a measure of your trustworthiness to repay a loan. 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 avoid nasty surprises. Otherwise, if you apply and are rejected, a black mark will be added to your credit report.
There are three credit reporting companies in New Zealand that you can contact about getting a copy of your credit report:
6 Is your paperwork in order?
A lender will want you to provide:
- Proof of income, such as a payslip or tax return
- Proof of your current ongoing expenses, such as rent and bills
- Copies of your current bank statements to show savings and repayments being made on credit cards
- Personal identification, for example a passport or driver's licence
7 Have you shopped around?
Look for a loan that suits your budget and provides great value for money. Compare personal loans using Canstar's comparison tool.
What impacts a personal loan interest rate?
Most non-bank lenders use a risk based system to work out a borrower's interest rate. The higher the risk of a borrower defaulting on a loan, the higher the interest rate.
Default risks can be based upon:
- Your credit score: your credit score will have a big impact on the interest rate you're offered. The better your history of repaying your debts, the lower the rate you'll be offered.
- Loan size and repayment term: larger loans with repayments spread over long periods are judged an increased risk for lender and will attract higher rates of interest.
- Your current debts: if you have a lot of debt, you will be judged as a higher default risk.
- The loan purpose: lenders will think more highly of a loan that's being used to purchase an enduring asset, such as a new kitchen, rather than to splurge on a holiday.
How much can I borrow with a personal loan?
The amount you can borrow depends on several factors, including your choice of lender, creditworthiness, income, and overall financial situation.
When assessing how much you can borrow, a lender will consider your:
- Credit score: do you have a history of successfully paying off your debts?
- Personal situation: for example whether you have dependents and if you're making a single or joint loan application.
- Income: lenders often consider the stability of your income source. A consistent, reliable income from a permanent job is typically viewed more favorably than irregular or seasonal income.
- Living expenses: what are your day-to-day living expenses?
- Debts: what other debt commitments do you have, including other loans, including home loans, and credit cards.
Secured/unsecured personal loans: what's the difference?
Personal loans are either secured or unsecured.
Secured loans: when you use something you own, such as a home, car or boat, as security against the debt. If you're unable to repay the personal loan, the lender may sell your asset to recover the debt. A car loan, for example, is usually secured against the car you are purchasing. Because there's a physical asset to back up a secured loan, it tends to have a lower rate than if it were unsecured.
Unsecured loans: the lender agrees to lend you money without you making a promise of security. If you aren't able to repay an unsecured personal loan, the lender might take you to court. As there is more risk involved with this type of loan, lenders usually charge higher interest rates. This means that although you can use an unsecured loan to buy a car, you might be able to get a better rate by using a secured loan instead.
Note: While standard car loans are secured against the automobiles they are used to purchase, some lenders will allow you to use an unsecured loan to purchase a vehicle. This is why The Cooperative Bank's Unsecured Personal Loan | A++ to A rates highly in both our personal loan categories.
Personal loans: banks vs non-bank lenders
When considering personal loans, you have the option of obtaining them from traditional banks or non-bank lenders. Each option has advantages and disadvantages, and the choice that's best for you depends on your individual financial situation and needs.
Bank personal loans
There are many reasons why taking out a personal with a bank may be the best option for you. These include:
- Interest rate clarity: many banks have one standard fixed interest rate that applies to all their personal loans.
- Established reputation: banks have a long history and established reputations, which can make borrowers more comfortable.
- Regulation and stability: banks are heavily regulated financial institutions, which can provide a sense of security for borrowers. They are subject to strict lending and consumer protection laws.
- Branch accessibility: you can visit a local branch for in-person assistance and applications.
- Relationship banking: if you already have an account with a bank, they may offer you more favorable terms due to your existing relationship.
Non-bank personal loans
Taking out a personal loan from a non-bank lender can have several advantages, depending on your financial situation and needs. Here are some reasons why you might consider a personal loan from a non-bank lender:
- Faster approval: non-bank lenders often offer quicker approval and disbursement of funds, which can be crucial in emergencies
- Flexible qualification criteria: non-bank lenders may be more lenient with credit requirements, making it easier for individuals with less-than-perfect credit to obtain a loan, in return for paying higher rates of interest.
- Online convenience: many non-bank lenders operate primarily online, which can be more convenient for tech-savvy borrowers.
- Specialised loan products: non-bank lenders may offer specialised loan products for specific needs, such as peer-to-peer loans, debt consolidation loans, or payday loans.
What is a joint personal loan?
A joint personal loan is a loan you take out with another person, such as a partner, family member or friend. The two people are called co-borrowers. Each person is equally responsible for repaying the loan, meaning if one person can't make their repayments, the other person is responsible for the full amount.
Why take out a joint personal loan?
There are various reasons why a joint personal loan can be appealing. For example, you might be interested in sharing an asset (such as a car) with your family member, or you could be funding a joint expense (such as a wedding or holiday) with your partner.
Joint personal loans can also potentially give you access to a larger loan amount, as there are two people repaying the amount borrowed, compared to just one. When you apply for a joint personal loan, the lender will consider the financial circumstances of both applicants.
What are the risks of a joint personal loan?
Getting a loan with another person involves sharing financial responsibility. If your co-borrower is unable to make repayments, vanishes or refuses to pay, you will be responsible for the repayments in full.
If you then default on the debt, the lender can choose to chase one or both of you for the whole amount, and can take one or both of you to court to recover the money.
Your credit score could also be negatively impacted, which could affect your chances of getting approved for a loan or for credit in the future.
It's important to carefully consider a joint personal loan. Is your co-borrower reliable? Do they have a poor history of managing their money? If they are your current partner, are you likely to be with this person for the duration of the loan?
How do you apply for a joint personal loan?
Applying for a joint loan is similar to applying for a regular loan. Generally, you will both need to provide your personal and financial details, which the lender will assess as one application instead of two. You will both need to meet the eligibility criteria.
Pros and cons of joint personal loans
Pros
- Potentially a greater chance of approval.
- You may be approved for a larger loan.
- Could be helpful if you are using the loan for a shared asset or expense.
Cons
- You have to rely on your co-borrower meeting their repayment obligations.
- You can be liable for the whole payment if your co-borrower fails to make their repayments.
- Could impact your relationship with your co-borrower.
Can I have more than one personal loan?
If you already have a personal loan, you can certainly apply for another one. However, it's worth noting that individual lenders will have their own policies about the number of personal loans they offer to the same customer. So there may be some limitations there. A lender will also take into consideration debts you have with other lenders when assessing your loan application.
How many personal loans can I have at once?
In theory, at least, if you meet a lender's criteria, and your income is sufficient to cover the repayments on multiple personal loans, there is no legal limit on the number of loans you can have.
However, there are downsides to having lots of personal loans at once. Including potential damage to your credit score and the risk of getting into serious financial trouble if you have unmanageable debt.
Is it a good idea to have multiple loans?
Having multiple personal loans is a financial decision that should be made carefully and based on your individual circumstances and needs. It's not inherently good or bad to have multiple personal loans, but there are several factors to consider before taking on additional debt.
Consider the reason for taking out multiple personal loans. Are they for essential needs like medical expenses or education, or are they for non-essential purposes like vacations or luxury items? Prioritise loans that serve critical needs and carefully evaluate the necessity of others.
The main risk when taking out multiple loans is financial overextension. Just because you may be approved for another loan, doesn't mean you can afford to pay it off in the long run. Determine whether you can comfortably afford the monthly payments on multiple loans. Calculate your total monthly debt obligations, including the new loans, and ensure that your income can cover these expenses without causing financial strain.
If you're considering taking out multiple personal loans, it's a good idea to consult with a financial advisor who can provide personalised guidance based on your specific financial situation. They can help you assess the risks and benefits and develop a plan to manage your loans effectively.
Can I get a personal loan if I have a bad credit score?
If you've a bad credit history, it's still possible to get a loan. However your choices will be more limited, and if you application is accepted, it will undoubtedly cost you more in interest.
Lenders grade their loans according to customers' credit ratings. If you've got perfect credit, you'll be offered an interest rate a lot lower than somebody with a terrible credit rating.
Currently, there's a big difference in interest rates and charges on Canstar's database: interest rates start around 8%, they can be as high as 29%.
However, if you've a very bad credit score, it's likely that your application will be rejected, which further negatively impact your credit score.
So if you think you've a poor credit history, it could be advisable to not apply for any credit until you have checked your credit report. And, if you find you do have a poor credit rating, it could pay to work on improving your credit score before applying for a loan.
For more information on improving your credit score, check our story How to improve your credit rating.
How much do I need to earn to qualify for a personal loan?
There's no single income requirement. When assessing your application, a lender will factor in your income, credit rating and existing debts when deciding whether you qualify for a loan.
However, generally, a lender will want to see that you have a steady source of income, and enough money each month to cover any potential debt repayments.
Lenders may require verification of your employment to ensure that you have a steady income. They may request pay stubs, tax returns, or other documents as proof of income.
How to pay off a personal loan faster
Paying off a personal loan faster can save you money on interest and help you become debt-free sooner. Canstar explains some strategies to accelerate the repayment of your personal loan.
1. Make extra payments
Making extra payments on your loan is one of the most effective ways to pay off your loan faster. You can make extra payments through:
- Paying bi-weekly: when you make bi-weekly payments, you end up making 26 half-month payments, which works out to be 13 full-month payments. This means you are effectively making an extra month's worth of payments. For example, if you're repaying $1000 per calendar month, pay $500 fortnightly instead. This amounts to $13,000 in bi-weekly payments over 12 months, instead of $12,000 paying by the month.
- Allocate windfalls: whenever you receive unexpected money, like a work bonus or a tax refund, consider putting a significant portion of it toward your loan.
2. Round up payments
Round up your monthly payments to the nearest ten or even to the next hundred if you can afford it. Paying a little extra each fortnight or month will add up quickly, and shouldn't make a big difference to your weekly spending money.
Decide how much you want to round up your payments. You can round up to the nearest ten, hundred, or any amount that suits your budget. For example, if your minimum payment is $176, you might decide to round it up to $200.
If your financial situation changes, you can adjust the rounding amount. You can increase it if you have more funds available or decrease it if you need to free up some cash for other expenses.
3. Negotiate a lower interest rate
Contact your lender and inquire about the possibility of lowering your interest rate. Sometimes, lenders are willing to reduce your rate, especially if you have a good payment history. To improve your standing, set up automatic payments to ensure you never miss a due date, and consider making extra payments manually when you can.
Before accepting a lower interest rate or refinancing with a new lender, review the terms and conditions of the loan carefully. Ensure that the new terms align with your financial goals and that there are no hidden fees or costs.
4. Create a budget
Writing a budget is an essential first step to begin managing your finances effectively. A budget can help you get on top of debt, save for the big things and ensure you still have fun. Create a detailed budget to track your income and expenses. Identify areas where you can cut back and redirect those savings toward your loan payments.
5. Consolidate debt
Debt consolidation is a financial strategy that involves combining multiple debts into a single, more manageable loan. The main purpose of debt consolidation is to simplify debt repayment. Consolidating your debt into a single, low-interest loan can help you save money in the long run. Plus, by taking out a new loan (or adding to an existing one), you only have to keep on top of one set of repayments.
6. Snowball or avalanche method
If you have multiple loans or debt and choose not to consolidate them, consider whether the snowball or avalanche repayment method is best for you. The snowball method involves paying off the smallest debts first, while the avalanche method focuses on the highest interest rate debts. Whichever method you choose, use any freed-up funds to tackle your personal loan.
Typically, the avalanche method is quicker at paying off debt, as it prioritises paying off the debt with the highest interest rate first, which in turn means that your debt will accumulate less interest charges. However, a snowball repayment method may work better in your situation. Consult a financial advisor to find out which strategy is best for you.
7. Increase your income
Increasing your income can be a powerful strategy for paying off loans faster because it provides you with more money to put toward your debt. Look for opportunities to increase your income, such as taking on a part-time job, freelancing, or selling unused items.
What is debt consolidation?
Debt consolidation is a financial strategy that involves combining multiple debts into a single, more manageable loan. The main purpose of debt consolidation is to simplify debt repayment. By taking out a new loan (or adding to an existing one), you only have to keep on top of one set of repayments.
Also, if you can find a personal loan that offers a lower rate of interest and fees than your current loans, it could be possible for you to save money and become debt-free sooner.
Is debt consolidation a good choice?
While debt consolidation can be a helpful financial strategy, there are certain situations when it might not be the best choice. Here are some situations when you might be better off avoiding debt consolidation:
- You're already struggling to make ends meet and won't be able to pay the consolidated debt
- Your debt is a result of poor spending habits. If you don't first address your financial choices, you may end up accumulating more debt, even after consolidation
- Unstable income or employment means you might not be able to pay off the consolidated debt
- You already have existing low-interest debt. Consolidating your debt in this case could mean you end up paying higher interest rates
If any of the above are applicable, it might be best to consider avoiding debt consolidation and going with another option instead. Other options can include:
- Creating a strict budget and repayment plan
- Prioritising repayments of high-interest debts
- Seeking help from a financial mentor
As with all financial decisions, before deciding on debt consolidation or any other debt management approach, it's crucial to carefully evaluate your situation, balance any possible benefits and costs, and to seek advice from a financial professional.
Car loan vs personal loan: what’s the difference?
The main difference between a car loan and a personal loan, is that a car loan is usually secured against the vehicle that it's being used to purchase.
This means that if you don't keep up your car loan repayments, the loan company can repossess and sell your car to recover your debt.
However, some lenders will allow you to use an unsecured loan to purchase a vehicle.
Am I eligible for a personal loan?
You’re generally eligible to apply for a personal loan in New Zealand if you are:
- 18 years or older
- An NZ citizen or permanent resident
- Employed, or have a steady income source
- Possess a good credit history
When applying for a personal loan you should expect to have to provide the following documentation:
- Proof of identity: driver licence, passport, birth certificate, etc.
- Proof of employment and income: you'll need to provide evidence/bank statements that show that you've a regular source of employment and income.
- Other debts and living expenses: a lender will want to look at your regular expenditure and any other debt obligations.
- Your assets: depending on the loan size, you might be asked to provide evidence that you have significant assets, such as a home, car or boat.
Tips for getting a personal loan approved
Before applying for a loan, it's advisable to:
- Ensure your credit score is healthy: check your credit score and if it's not very good, work at improving it before applying for more credit.
- Reduce your debts: the lower your overall debt level, the greater the chance of having your loan application accepted.
- Create a savings plan: lenders like to see that you can live within your means and have money left over to contribute to a regular savings plan.
When applying for a loan, it's advisable to:
- Not submit multiple applications: every loan application you submit will negatively impact your credit score, so don't make multiple applications at once, hoping one will be approved.
- Work out how much you can afford to borrow: use a repayment calculator and work out how much you can realistically afford to borrow. If you know you won't be able to afford a loan, don't apply for it, as a rejection will only hurt your credit score.
- Check a lender's eligibility criteria: making sure you're clear on a lender's loan eligibility criteria, and ensuring you meet them before making an application, will improve your chances of approval.
- Fill in the application correctly: don't rush the application form and ensure all required fields are completed truthfully.
- Be prepared: have all your relevant documentation ready to present to the lender.
Is a personal loan right for me?
Whether a personal loan is the right solution for you depends on your needs and circumstances. A personal loan can help you cover an emergency expense or spread the cost of a large purchase over time, which may be preferable to loading it up on a credit card (which usually comes with higher interest rates) or redrawing on your mortgage. However, it’s still a form of debt that must be repaid with interest over a fixed period.
Before taking out a personal loan, consider:
- Whether you can comfortably afford the repayments
- How much interest and fees you’ll pay overall
- Whether there are alternative ways to fund the expense.
If you're struggling with ongoing financial pressure or relying on loans to cover day-to-day living costs, speaking with a financial counsellor may be a better option.
What happens if I'm rejected for a personal loan?
If your application is rejected, it's important to understand why. You can ask the lender directly why your application was rejected, and if you've not already looked into your credit history, it's advisable to order a copy from the providers listed above to check what's affecting your ability to access credit.
Until you understand the reasons for your rejection, don't apply for any further loans, as every rejection will further harm your credit score and sit as a black mark on your credit history.
For more information about fixing a bad credit history, check out our story How to improve your credit rating.
