Thinking of taking out a personal loan? To help you get off on the right foot when comparing, ruminating, and applying, we’ve compiled a selection of expert insider tips:
Tip 1: Time is money
Most personal loan lenders look at your outstanding debt each day and charge interest accordingly. That means the longer you hold onto a loan, the more it’ll usually cost you, as more time will pass for interest to accrue. That said, when you’re deciding how long you’ll need to pay a personal loan off, the shorter its term, the higher your regular repayments will be.
Canstar Data Insights Director, Sally Tindall says “the trade off for this is that you’ll pay less in interest, making the loan cheaper overall.”
The takeaway: If you can fit higher repayments into your budget, you’ll generally be better off in the long run.
Tip 2: Rates can change depending on your loan term
Personal loan rates can vary based on many factors, including a loan’s term, with Canstar Research Analyst, Tom Pownall warning that shorter terms tend to attract higher rates.
“Typically, one-year loans carry noticeably higher rates than three or five-year loans,” he said. “Comparing your options across different loan terms can be worthwhile.
“This is because lenders need to earn a minimum return on the capital they deploy, and a shorter loan generates less total interest income.”
Tip 3: Use soft credit checks where possible
When you apply for a loan, a lender will usually perform what’s called a ‘hard’ credit inquiry, and this will be recorded on your credit report. Multiple hard inquiries in a short space of time can negatively affect your credit score and make you look like a higher-risk borrower.
“Multiple applications within a short period could reduce your chances of approval or lead to less competitive rates” warns Mr Pownall.
“Where available, soft credit or eligibility checks can help you estimate your likelihood of approval without affecting your credit score.”
Canstar’s personal loan eligibility tool offers a soft credit check, allowing you to view loans on our database you may be eligible for. You can also review a lender’s eligibility requirements or contact it directly to learn if you meet its criteria, reducing your risk of being denied.
Tip 4: Understand risk-based pricing
You’re probably aware that insurers use your personal information to calculate your premiums based on risk, but did you know the same can apply when you take out a personal loan?
“Most lenders use risk-based pricing, which means you get a personalised rate based on your risk profile or credit score” Mr Pownall said. “If you have an excellent credit score, use soft-check pre-qualification to compare actual offered rates without affecting your credit score.
“If you know your credit score is average, be aware of this form of pricing and focus on improving your credit score before applying.”
You can check your credit score for free with Canstar and via the Canstar App.
Tip 5: Check for ghost debts or errors on your credit report
Just like us all, credit reporting agencies sometimes get it wrong.
“Checking your credit report for inaccuracies and disputing any you find is an easy way to help improve your credit score” suggests Mr Pownall.
“Reducing outstanding debt and managing credit responsibly can also strengthen your credit profile, which may improve your borrowing capacity and help you qualify for more competitive interest rates.”
Tip 6: Consolidating debt into a personal loan may be cheaper than into a mortgage
Thinking of consolidating debt into your mortgage? Doing so may actually cost you more in the long run than a debt consolidation loan.
“Your home loan may have a lower interest rate than a personal loan, but it probably has a much longer life span” Canstar Finance Editor, Brooke Cooper says.
“Consolidating smaller debts into your mortgage may see you paying more in interest over years or decades, despite the lower rate.”
Tip 7: If you’ve increased your credit score since having your loan, consider refinancing
The best personal loan interest rates are often reserved for borrowers with high credit scores. If your credit score was average when you took out your current personal loan, your rate may not be competitive. That said, if you’ve been actively making your repayments, this has likely improved your score, and you could have more options.
“If your score has improved since you first took out the loan, you may be able to refinance to a more competitive rate” says Ms Cooper.
Refinancing means to take out a new loan to repay an existing debt. Ideally, the new loan will have a better interest rate, fewer fees, or more features than your current one. Just be aware of exit and application fees, and make sure these don’t outweigh any savings you stand to make.
Tip 8: The early exit strategy
The quicker you can pay off your loan, the more money you’ll usually stand to save.
“Where possible, look for loans with flexible repayment features, such as unlimited extra repayments and low or no early termination fees” suggests Mr Pownall.
“This can give you greater flexibility to pay down your loan faster or refinance in future without facing significant penalties.”
Tip 9: Check the terms on your redraw facility
A redraw facility gives you the option to withdraw any additional repayments you’ve made towards your loan at a later date. This may prove useful if a large unexpected expense, like car repairs or a big energy bill, comes up down the track.
That said, some lenders impose restrictions on how you can use your redraw facility, like barring you from redrawing until you’ve made a certain number of extra repayments or held the loan for a certain amount of time.
“Just because a lender offers a redraw facility doesn’t mean it’ll be easy to access or beneficial for you” warns Ms Cooper.
