Co-author: Michelle Norton
What are personal loans?
Personal loans are fairly straightforward financial products. A personal loan is where you borrow a specific amount of money, usually from a financial institution, and then repay the debt with interest in equal payments, over an agreed term.
Personal loans offer the general advantages of being cheaper, on average, than the closest alternative (credit cards) as well as giving the discipline of a repayment schedule.
Many personal loans allow the borrower to make extra repayments. Every dollar you repay above the required repayment shortens the life of the loan, as well as the overall cost.
There are two main categories of personal loans: secured or unsecured.
What’s the difference between an unsecured personal loan and a secured personal loan?
Secured personal loans use an asset to secure the loan, such as a car. This asset is then used as a kind of security against the debt. The money borrowed can generally be used for any legal purpose, such as debt consolidation, home renovations, school fees, paying for a holiday or buying a car – although, check with the lender first! If you are unable to repay the loan, the lender may be able to sell your security item.
Unsecured personal loans are when the lender agrees to the loan without taking a security. The loan is still subject to your ability to repay it and, if you aren’t able to do so, the lender may take you to court. The interest rates on unsecured loans are, on average, higher, than secured personal loans, which reflects the higher risk of losing money for the lender.
When applying for a personal loan, be it secured or unsecured, you should always check the following information with your lender.
Questions to ask your personal loan lender
What is the personal loan interest rate?
Currently on Canstar’s database on 27 November 2017, unsecured personal loan interest rates range from a low of 6.99% to a high of 29.99%. In the case of car loans, interest rates range from 6.99% to 29.99%.
How can I qualify for a lower personal loan rate?
The interest rate that you are charged will depend, in part, on your credit rating. If your credit rating score is too low, you may find that the lender declines your loan application. To help prevent this from happening, you should obtain a copy of your credit file and check to ensure there are no nasty surprises.
Are there any application or ongoing fees for this personal loan?
Many personal loans have both an application fee and an ongoing fee. Some may also charge you an early repayment fee! Canstar’s 2017 personal loan star ratings shows upfront costs range from $150.00 to $600.00 for an unsecured personal loan, and from $150.00 to $1200,00 for a car loan. Upfront costs are based on a $20,000 loan paid off over five years for a car loan, and $10,000 for an unsecured loan paid off over three years.
Can I make extra repayments or lump sum repayments to the personal loan?
Most lenders will allow you to make extra repayments, but it’s certainly worth asking the question.
How can I check how much I have owing?
This is generally pretty easy – most financial institutions have good online banking services.
How can I make my repayments?
Generally, repayments will be set up as an automatic direct debit from a nominated bank account. Just ensure that you have enough money in there each month to cover the cost!
What other fees are there attached to my loan?
Does the lender charge a monthly account-keeping fee or administration fee? What about a late repayment fee, or an early discharge fee? Make sure you get a full list of fees and charges that could potentially be charged to your loan account.
And, of course, shop around! There are plenty of personal loans available, so compare the personal loan market to ensure any loan fits your needs.
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