When considering the right loan for your purpose, there are four choices you will have to make. These are:
- The amount you want to borrow
- The length of time you want to borrow the money for
- Whether the loan will be secured (against an asset, such as your house or a car) or unsecured
- Whether you want a fixed or floating interest rate
The amount you want to borrow is fairly straightforward. Be aware, though, that fees and charges will bump up your monthly repayment figure, so always factor those in before you apply for a loan.
The length of time you take out the loan for is entirely dependent upon your capacity to repay. The only way to truly know how much you can afford is to have a comprehensive written budget and to ensure that the loan repayment can be easily absorbed. Don’t forget to take into account any future increase in costs or unpaid leave you might take down the track. Many personal loans are available for up to 10 years.
There are two things to take into consideration here – cut the loan term too short and you may find yourself struggling to find that larger amount of money each month. On the other hand, if you spread the loan over too long a term, you’ll pay more interest overall. Let’s look at an example:
|$10,000 borrowed over 10 years|
|Total repayment over 10 years||$20,102|
|$10,000 borrowed over 6 years|
|Total repayment over 10 years||$15,618|
So, in the example above, reducing your loan term by four years will increase your monthly repayments by $49, but will reduce your total repayment by almost $4,500.
Canstar’s pre-application checklist:
- Read our guide on what to think about when choosing a personal loan.
- Use our personal loans repayment calculator and work out what kind of repayments and interest rate you could afford on top of your normal budgetary expenses.
- Decide on whether you want a secured or unsecured loan.
- Get a copy of your credit rating, to make sure you’re not going to be rejected for your loan application and get a black mark on your credit history.
Loans in New Zealand – secured or unsecured?
Before you apply for a loan, it’s important you understand the difference between secured and unsecured loans in New Zealand.
Secured means the loan is taken out against an asset, giving the lender the right to repossess that asset should you default. A secured loan type is seen by the lender as a lower business risk and, as such, a secured loan will tend to attract a lower interest rate.
An unsecured loan is the opposite. Money is lent without the lender taking security over an asset. This is deemed riskier by the lender and the interest rates charged will generally reflect this.
Compare interest rates before you apply for a loan
There’s one final point to think about before you apply for a loan. Choosing to fix your interest rate, or take your chances with a floating rate is, once again, entirely personal. Fixing your interest rate gives you certainty that your repayments will stay the same for the term of your loan. It’s a buffer against rates going up and hence increasing your repayment amount. A rate increase may cause a problem if you are on a strict budget and only have a set amount to devote to the loan. The downside is, of course, that if rates dive further you may end up paying a higher amount.