Earlier this year, the government passed new legislation limiting the amount of personal loan interest that lenders can charge their customers. It was in response to unscrupulous lenders charging clients astronomical interest rates that sucked them into unescapable whirlpools of debt.
Since June, it’s been against the law for lenders to charge:
- More than 100% of the loan principal in interest and fees
- Compound interest on high-cost loans
- Default fees over $30, unless the lender can show that the higher amount reflects their costs
Put simply, this means that if you borrow $1000, you won’t have to pay back more than $2000. OK, great, it’s reassuring to know that loan repayments are capped. However paying 100% interest – $1000 to borrow $1000 – is still a ridiculously huge amount to pay. Especially when you consider the Official Cash Rate, which influences the price of borrowing money, is just 0.25%.
But while loan companies aren’t allowed to charge you more than 100% of your loan, some are still charging very high levels of interest – up to 292% p.a. in some cases!
Personal loan interest: 292%
Yes, you read that figure correctly: 292% p.a. So, if loan providers are not permitted by law to charge more than 100% of a loan amount in fees and interest, how on earth can they charge 292% p.a.?
Simple, they limit the term of the loan. This means that for a loan charging 292% interest, which was at the upper limit of the rates Canstar’s research uncovered, the term of your loan will be restricted to around four months, or one third of a year.
So, over the course of the loan, you’ll pay just one third of the year’s 292% p.a. interest. A figure that approximates to 100% interest over duration of the loan. The maximum amount permitted by law.
Personal loans: what to look out for
Of course, loan companies aren’t going to advertise that their loans can come with 100% interest, that’s why it’s essential to do your research and read the fine print before taking out a loan. Some of the key things to consider include:
Your credit score
Your credit score will have a BIG influence on the interest rate you will be able to secure. The ultra-low interests rates that are flashed around are reserved for those with impeccable credit scores.
One big loan provider researched by Canstar has 25 levels of risk and advertises rates from 6.99% to 28.69%. But only the top three risk levels have sub-10% rates, while the bottom 14 risk levels are all over 20%.
So, if you are looking for a personal loan for a non-essential item, it pays to first work on your credit score. For more information on improving your credit rating, check out our story: Bad Credit Score? Four Steps to Improve Your Chance of Credit Card Approval.
True interest rate
Always check the exact interest rate that you’ll be paying. Most loan companies have calculators and are clear about their true interest rates. Per annum, or p.a., is the rate you want to concentrate on – which is the standard measure of interest rates.
Some loans are advertised at the per day rate, which can be misleading and hide much higher charges. For example the 292% p.a. figure we mention above works out at 0.8% per day – which doesn’t sound much, until you multiply it by the number of days in a year: 0.8 x 365 = 292% p.a.
Other fees and charges
These can quickly add up:
Establishment fee: some lenders don’t charge establishment fees, although will hit you with higher interest rates. Others charge a fee depending on the size of your loan. Always be aware of how much you’re paying as a proportion of your loan.
For example, a company has a $100 establishment fee for loans up to $1000, so you’re paying a 10% fee for a $1000 loan.
But for loans between $1,001 to $3500, the rate increases to $250. So, if you’re borrowing $1500, you’re being charged a fee of approx 17%.
Other fees include:
- Administration fee: for example $2.50 per repayment, which adds up over 36 monthly repayments
- Variation fee: to change the terms of your loan
- Full repayment fee: to pay off your loan early. This can run into big amounts if it covers the lender for any loss of interest
Securing a low rate
Of course, thanks to the new legislation, whatever fees and interest you do end up paying won’t be more than the sum of your original loan. But, if you can help it, you don’t want to pay 100% or even 292%! So, before signing up to an exorbitant rate consider:
Low-interest credit cards
These are a great option, offering rates from around 10% p.a., plus low annual fees. And if you’re considering a personal loan as a way of taming credit card debt, there are 0% or very low introductory offers for balance transfers.
Check out our story: Lowest Rate Balance Transfer Credit Cards. To compare the best low-interest credit cards in the market, just click the button below.
Lower-rate personal loan
Thankfully most reputable lenders – from finance companies to the big banks – don’t charge 292% p.a. And there are plenty to choose from, as a quick search on Canstar’s personal loans comparison table reveals.
For a $5000 loan over 12 months, there are per annum interest rates ranging from 6.49%, for those with the best credit rating, through to just under 27% p.a. Even if you’ve a poor ‘D’ credit rating, there are still loan options around 16% p.a. Application fees for the same sum range from $50 to $350.
What this shows is that if you’re willing to shop around and compare lenders, you don’t have to pay sky-high interest rates.
The best way to ensure you get the best rate is to do your research and check out all the lenders in the market. A great way to do this is to use Canstar’s free personal loan tool. It compares all the big banks and lenders across loan rates and fees in one easy-to-use tool. It also gives added information about Canstar’s expert research into the best loan providers and our prestigious Star Ratings and awards.
To check out our loan comparison tool, just hit the big button below. Or, for more information about The Co-operative Bank, the winner of Canstar’s 2020 Most Satisfied Customers Award – Personal Loans Provider, click this link.
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