Things to Consider Before Getting a Personal Loan

A personal loan could be the right option for you, but it’s important not to rush into it. Canstar breaks down some things to consider before getting a personal loan.

Personal loans can seem pretty straightforward. And, in many ways, they are. If you have costs you can’t afford, whether unexpected bills or simply a vacation, you can borrow money in the form of a personal loan. In return for generously lending you money, you pay the lender interest.

But if you’re not careful, hidden fees, technical terms, sky-high interest rates and more can end up making a personal loan not so simple. And it can all add up. At best, it can make the loan no longer worth it. At worst, it can snowball and sink you into debt.

To ensure a personal loan is going to help (and not hurt) you, it’s important that before you get a loan, you not only understand how personal loans work but consider a wide range of factors.

Canstar guides you through some things to consider before getting a personal loan:

How much do you need to borrow?

The more you borrow the more the loan is going to cost you. So, don’t borrow more than you actually need. Make sure to do a breakdown of costs and expenses, to get as accurate a figure as possible, as rough estimations could end up hurting you.

You’ll be paying interest, fees, and making monthly repayments on your loan. The higher the loan amount, the higher these are likely to be. It may also drag the loan out for several years. Again, adding more cost.

The table below displays some of our referral partners’ unsecured personal loan products for a three-year loan of $10,000 in Auckland (some may have links to lenders’ websites). The products are sorted by Star Rating (highest to lowest) followed by company name (alphabetical). Use Canstar’s personal loan comparison selector to view a wider range of products on Canstar’s database. Canstar may earn a fee for referrals.

Explore your options

We can’t all pay for a house, car, wedding, or unexpected bill without some assistance. And, despite the risk a loan can bring, it can be a great financial tool. But at the end of the day, it is one that comes with interest, fees, and the potential to sink you into debt. So it’s important to consider your options carefully.

Once you’ve figured out how much you want to borrow, the obvious question to ask is if you need the borrow it at all. If the loan is for a luxury that you don’t need, perhaps go without. If it’s for something you do need, can you get it while avoiding a loan? Think about picking up some extra work, cutting back on expenses, or even selling unwanted goods.

Because while helpful, a personal loan shouldn’t be your primary option.

If you do need a loan, consider borrowing from a family member first. They are likely to offer you nicer terms than a bank. But be careful, you don’t want to sour any relationships.

Otherwise, consider a guarantor loan. This is a loan that is guaranteed by a friend or family member. This may make it easier for you to get approved for a loan if you might otherwise not qualify. Some banks also offer favourable interest rates if your guarantor has a good credit history or plenty of secured assets.

Can you improve your credit score?

If you are going to get a personal loan, it’s worth considering doing everything you can to secure the best terms. The best place to start is by checking your credit score. Here you can see the shape of your credit history, plus any mistakes that may need correcting. It could also help you see any habits that are having a negative impact, such as leaving your electricity bill until the final warning before you pay it. Obviously, if you need the loan urgently, you may have to apply for a loan, even with bad credit. But if possible, consider taking some steps to improve your credit score before applying. This will help you secure a better deal.

Some steps could include:

  1. Pay your bills on time
  2. Pay down any existing loans and debts
  3. Consider seeking the assistance of a financial counsellor
  4. Hold onto credit cards you can manage
  5. Lower the limit on your credit cards
  6. Cancel cards/BNPL schemes you no longer need

→Related article: How to Improve Your Credit Rating: 7 Steps

Consider the interest rate … and everything else!

The interest rate is the first thing we look at when considering a loan. The lower the rate, the better. Right? Well, yes … sort of. Obviously, you want to secure the lowest interest rate you can. But that’s not all you should be considering. There are plenty of other factors that could impact the desirability of a loan. They could even make a lower rate loan more expensive than another.

The fees

Fees are one of the first things you should be considering. Loans can come with a host of them. And they can impact any savings a lower interest rate could be earning you.

Some fees that could be attached to your personal loan are:

  • Application fees – these are charged for the cost of establishing the loan
  • Annual fees charged every year for the duration of the loan
  • Early repayment fees if you suddenly have expendable income, and want to pay off the remaining loan early, some lenders will charge you to do so
  • Missed repayment fees if you don’t make your repayment you could be charged a penalty fee

Also, there could be other ongoing fees, such as documentation fees or redraw fees. It pays to consider and compare all of these before applying for a loan.

Some fees are charged by all lenders, so look for which lenders charge the least. Then again, if an interest rate is great, you may be more willing to pay higher fees.

The length

The longer you spread out a loan the less you pay every month. After all, paying back a $10,000 loan over five years allows you to chip away at it little by little. Paying it back in one year? Not so much.

But remember, you pay interest for the entirety of the loan term. So, the longer the loan, the more interest you pay. Consider your expenses, and how much you can afford to repay every month. You want your loan term to be as short as possible, without overextending yourself. It’s better to pay more interest than be too ambitious and not be able to meet repayments.

By comparing a personal loan with an interest rate of 6.99% (the lowest rate currently on our site) you can see how the loan length impacts how much interest you pay.

Amount borrowed Interest rate Loan length Monthly repayments Interest paid
$10,000 6.99% 3 years $309 $1114
5 years $198 $1878
7 years $151 $2674

By cutting two years off your loan term (seven years down to five years) you can decrease the interest paid by almost $800. All while increasing monthly repayments by only $47.

To check out how much your personal loan could cost you, check out Canstar’s Personal Loan Calculator

→Explore: Canstar’s Personal Loan Calculator

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.
  • Unsecured – 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.

→Related article: Comparing Personal Loans? Top 4 Traps to Avoid

Consider your lender

Obviously, the best way to get the best loan is to shop around. Don’t just take the first lender, but be sure to compare the interest rates being offered to you. Alongside fees, and payments terms. If you’re willing to shop around and compare lenders, you’ll be able to secure the best possible loan rates and fees.

Compare Personal Loans

The table below displays some of our referral partners’ unsecured personal loan products for a three-year loan of $10,000 in Auckland (some may have links to lenders’ websites). The products are sorted by Star Rating (highest to lowest) followed by company name (alphabetical). Use Canstar’s personal loan comparison selector to view a wider range of products on Canstar’s database. Canstar may earn a fee for referrals.

author andrew broadley

About the author of this page

This report was written by Canstar Content Producer, Andrew Broadley. Andrew is an experienced writer with a wide range of industry experience. Starting out, he cut his teeth working as a writer for print and online magazines, and he has worked in both journalism and editorial roles. His content has covered lifestyle and culture, marketing and, more recently, finance for Canstar.

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