5 things to consider before applying for a personal loan

Co-author: Michelle Norton 

At some point in your life, a big expense may come up that requires a loan to pay for. While a personal loan is an option that could work, it is not a contract to enter lightly. Canstar takes a look at what to consider before applying for a personal loan.

If you’re in the market for a personal loan, you’ll find there are hundreds of products to choose from. So, how do you know if a personal loan – and which one – would work for you and your own personal financial situation. To a certain extent, this will depend on the reason you need in the first place, your asset position and your ability to make repayments. But, there are some universal features of personal loans that are worth everyone considering.

Here are five key aspects of personal loans to consider before you apply:

The interest rate charged on the loan

It’s highly likely that you have already thought about this aspect but, in saying that, it is easy to overlook how much difference a percent or two could make in terms of the total lifetime cost of a 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. Please note, these numbers are indicitive only, to be able to show the potential differences in personal loan repayments. 

An easy way to check the rates that personal loan providers are currently offering is to use Canstar’s free personal loan comparison tools. You can sort personal loan options by rate, to see how personal loan providers in New Zealand stack up. Canstar also updates these rates when providers make any changes.

Compare personal loan rates in New Zealand

Repayment flexibility

Being in debt is never fun, so it’s worth having a look to see which providers give you the flexibility to make extra repayments – without penalty. That way, if you are lucky enough to get a bonus, or some other windfall that you weren’t expecting, you can put it towards clearing your personal loan. Make sure you check any terms and conditions of a personal loan to see whether there is any catch with making any additional payments.

As part of Canstar’s annual personal loan star ratings, Canstar considers what personal loan providers offer in terms of repayment capability features. You can read more on Canstar’s personal loans report, here.

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. Personal loan charges include a fee for application, as well as any potential charges for making early repayments.  Again, you can use Canstar’s free comparison tools to sort products by application fee. Have a look at personal loan providers’ charges, here.

Good service

While interest rates and fees are an extremely important factor to consider, they aren’t the be-all-and-end-all when it comes to choosing a personal loan provider and product. When you are choosing who to sign up with – if you decide a personal loan is right for your needs – you should consider what sort of service the provider offers. For example, does the provider allow you to access your loan details online? Do you receive accurate and prompt information to any customer queries? Staying on top of debt is task enough without throwing unanswered emails into the mix. Borrowers’ needs will be unique to their own personal situation, but these are two basic aspects of customer service that are universal.

To help you narrow down your options, Canstar surveys personal loan borrowers in New Zealand, to find out their level of satisfaction with personal loan providers. Have a look at what customers are saying about their experience with personal loan providers, in Canstar’s personal loans customer satisfaction report.

Read Canstar's personal loans customer satisfaction report

A comfortably short term

At first, a longer term loan might seem like an attractive option because the monthly repayments will be less – and you’ve got more time up your sleeve to knock that debt on the end. But this can actually be counter productive. It’s key to remember that the longer the term of your loan, the more expensive the total cost of the loan will be.

We’ve put together a table with some indicitive figures to show the differences in overall cost of an unsecured personal loan at 16%, based on three different loan terms: 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.

As you can see from the above figures, a difference of just two years in loan term can result in you having to pay more than $2000 ($2093) in extra repayments. Think about the loan term very carefully, before signing on the dotted line.

While it is obviously beneficial to save up the cash you need for all expenses, there may be a time where a personal loan is a short-term support to help you achieve what you want or need to do. Just make sure you go in eyes wide open and check what options are available, before you rush in.

See how personal loan providers stack up

 

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