WHICH LOAN IS RIGHT FOR ME?

How you pay for a big ticket item depends on the item itself and how long it will take you to pay the debt off. The main credit channels available are a personal loan, a credit card, store finance or, if you have a mortgage, redraw facility on that mortgage. The last option is only viable, of course, if you have built up money in your home loan by making extra repayments over time.

Each method of payment has its own pros and cons.

Credit cards compete with personal loans but credit cards are for disciplined spenders. For many people, it's a little too easy to spend way too much on impulse with a credit card.

Store finance is used by large chain stores as a means to help people buy whitegoods or homewares now and pay later. The interest-free length of time given to pay is a powerful drawcard, particularly if the purchase is made on impulse. However, if you don’t pay up in full before the end of the promotion, you can expect to be liable for punishing effective interest rates of 29% or more. At the time of purchase, all may seem rosy but trouble can lie ahead if something unforeseen happens such as you lose your job or a family crisis erupts.

Personal loans are a more measured, planned product typically used to finance goods or services a consumer has been wanting to buy for a while. This could be a car, holiday or any number of things. Personal loans are useful, too, for debt consolidation because they are the exact opposite of credit cards – there is no way of adding to your debt 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.

Home loan redraw is an attractive option for projects like expensive home renovations. Be mindful though that it’s likely you will not put extra dollars into the mortgage to cover the redraw amount. In effect, you may simply be lengthening the life of your home loan.

Being honest with yourself and determining the size of debt you are going into and how well you will repay that debt will put you in a better position to choose the best credit avenue for you.

Personal Loans ...