Which loan is right for me? Choosing the right type of loan

When it comes to funding payment for a big ticket item- and you don’t have the available cash -it helps to know what types of personal debt arrangements are available. The main ones are as follows:

Payday Loan:

A pay day loan is a small, short-term unsecured loan. The repayments usually coincide with the borrower’s payday “”“ hence the name. Payday loans are characterized by a high rate of interest charged and generally a low dollar value of loan.

This product is generally utilized by consumers who are not able to meet a sudden expense; it should not be used as a long term strategy to get out of debt, as the cost of the loan is usually high.

Overdraft facility:

An overdraft facility is an arrangement between the lender and the customer based on the customer’s credit rating and ability to pay back the money. Usually a personal overdraft may be approved for an amount of around $500. This facility allows the customer to overdraw their account at an interest rate which is similar to that charged on a typical personal loan. An overdraft facility can be both secured or unsecured.

This product tends to be a very small credit facility and for a very short term. It is not a tool used for debt management, but will help a consumer who occasionally needs to meet sudden bills or fees.

Credit Card:

A credit card is a revolving debt facility on which New Zelanders collectively owe approximately $5.6 billion at any point in time. It works on the principal that consumers can rotate their debt on a monthly basis and receive an interest-free period to pay back the debt in full to get the same initial benefit once again. It is an unsecured debt, with an average interest rate that reflects that arrangement, and has become a way of transactional life for many consumers.

It is a flexible tool for the purchase of goods and services, but not an ideal one for minimizing debt. Find out more about credit cards here.

Personal Loans:

A personal loan is a larger credit facility (up to $100,000) that can be taken for a longer term “”“ generally a maximum of 10 years.It can be a secured or unsecured loan.

It can be used to purchase large ticket items or alternatively as a great consolidation tool. Unlike credit cards there is no way of adding to a personal loan with more impulse purchases. You know exactly what your repayments are so that, slowly and steadily, the money owed is paid off. A credit card is risky for those who don’t want further debt and can’t trust themselves to walk past a shop without buying. With a personal loan consumers can be sure that at the end of their repayments, they will be able to get over their debt.

Home loan redraw:

Home loan redraw is an attractive option for larger projects such as home renovations. Be mindful though that if you do not put extra dollars into the mortgage to cover the redraw amount, you will in effect be simply lengthening the life of your home loan. Find out more about home loans here.

Being honest with yourself and determining the size of the debt you take on and how well you will repay that debt will put you in a better position to choose the best credit product for you.”

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