Personal Loans - October 14th
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A personal loan is a loan taken out for a personal reason. Personal loans are usually used for two things:
A common type of personal loan is a car loan. Because car loans so important and there are often different terms and conditions, we compare car loans separately on our website.
Debt consolidation through a personal loan is something that Australians find convenient, as personal loans tend to have lower interest rates attached than many credit cards. Importantly, personal loans also have a defined timeframe – a certain amount of time to pay it off. This is a great way to impose discipline! Many Australians fall into debt by having multiple credit cards and an instant gratification, “I want it now” mentality. Then they need to consolidate their debt into one place just so that they can meet the minimum repayments. It?s not a decision to take lightly, but sometimes it can be a good way to pay off your debts.
Part of the appeal of a personal loan is that they can be approved by financial institutions very quickly. Most financial institutions will approve or deny a personal loan in 1 – 3 banking days.
Personal loans do not include loans for property, business, investment, unpaid overdue bills and fines, and court-ordered damages payments.
Personal loans can be either secured (where the loan is secured against an asset) or unsecured (where the bank is relying solely on your income flow).
Personal loans can also be fixed rate or variable, which refers to the interest rate that applies to the loan.
A secured loan is where you put something that own (like your car) up as security against your debt. If you weren?t able to repay the personal loan, the lender may be able to sell your security item instead. View secured personal loans on our website.
With an unsecured loan, the lender agrees to lend you money without taking a form of security. The loan is still subject to your capacity to repay it, so you will need to provide proof of your income to the bank. If you weren?t able to repay the personal loan, the lender could still take you to court, but the risk of losing money is higher for the lender than for you. The interest rate on an unsecured personal loan will be higher by about 3.5% per annum on average, to reflect the increased risk to the bank. View unsecured personal loans on our website.
One type of unsecured personal loan is the personal overdraft, an overdraft feature attached to your savings or debit bank account. The overdraft allows you to access more money than you have, up to an approved limit. Interest is charged on any amount you spend of the overdraft. When the overdraft is in use, a monthly fee is usually charged; when the overdraft is not in the use, only the normal fees for your savings or debit account are charged.
The cost of a personal loan depends on how much you borrow, how long the term of the loan is, and the interest rate charged on the amount. Interest rates can vary from less than 6% (at time of writing) up to more than 14% for secured loans, and 8% to more than 18% for unsecured loans.
In 2015, CANSTAR?s research team provided the example of average interest rates of 9.16% charged on a $20,000 personal loan over 10 years. If the loan was secured, the total repayments over 10 years would be $30,600. If the loan was unsecured, the total paid would be $35,400.
As interest rates regularly go up and down, you should compare personal loans on our website to find what is a good deal at the time.
Personal loans can be taken out for as short as 1 month or as long as 20 years in some cases. While a secured personal loan or a car loan can potentially be for a term of 20 years, an unsecured personal loan has a shorter maximum term because they are riskier for lenders.
Of course, you?d hope that the majority of personal loans get paid off well before the maximum allowable period expires.
Peer to peer (P2P) lending is a method of lending that allows potential borrowers to borrow directly from lenders/investors instead of applying for a loan from a big bank. Most P2P lenders offer loans of up to $30,000.
It can be good for personal loan applicants who have a great credit rating but aren?t being offered a competitive low rate by the big banks. P2P loans can also potentially be cheaper because they don?t charge as many fees as banks do.
Peer to peer (P2P) lending is a well-established practice in the UK since 2005 and in the US since 2006, but has only recently arrived in Australia. In 2015, 22% of Aussies surveyed by Canstar Blue in 2015 said they would consider using a peer-to-peer lender. Some of the P2P lenders in Australia at time of writing are SocietyOne, RateSetter, ThinCats, Marketlend, DorectMoney, MoneyPlace and OnDeck.
To become a P2P lender/investor, you have to qualify as a ?qualifying individual sophisticated investor? with extensive investment experience and knowledge. Also, P2P loans aren?t covered by a government guarantee, so you may potentially lose money if your borrower cannot make the repayments.
If you want a personal loan that helps you, not just your bank, you need to set up a game plan before you apply. The vast majority of Australians – 79% of people surveyed by Canstar Blue in 2015 – say they are more likely to take out financial products such as loans with the institution they usually bank with. But you should always shop around for the best rate.
The type of personal loan you choose depends on your personal situation, but essentially there are four main choices you have to make:
Remember to factor in fees and charges when calculating your budget. And beware of hidden fees – on average, 33% of Australians surveyed by Canstar Blue in 2015 said they had been hit by unexpected bank fees or charges. Application fees to establish your loan can be around $150, and then there are the monthly fees, and even more fees if you have a car loan.
Stick to the amount you want to borrow and resist the bank’s offer to sell you more credit. You made a budget for a reason, and you don?t want to end up paying more interest on a loan bigger than you need.
You should have a comprehensive written budget that includes absolutely everything you spend money on monthly and yearly. You need to make sure that you can afford to pay your rent or mortgage if you have one, put petrol in your car and food on the table, pay your bills, and pay your monthly repayments on a personal loan. Try to think ahead to things like future medical expenses or unpaid leave you might have to take.
Remember to include in your monthly repayment calculations things like application fees and monthly loan fees. Try using our personal loans repayment calculator.
Shorter loan = higher monthly repayments. Longer loan = you end up paying more in interest. You should choose the shortest loan term that you know you can comfortably afford.
CANSTAR research shows the average loan is paid out in under four years. Make sure there is no penalty charged if you repay your loan early; most lenders don’t charge one, but those who do have an average early repayment fee of over $34, according to our research.
Secured loans give you a lower interest rate (10.65% average in 2015) but there’s a risk of losing the property you choose to use as security if you don’t meet your repayments. Unsecured loans have a higher interest rate (13.79% average in 2015) so you might end up paying more in interest over the life of the loan.
Secured or unsecured, make sure you never miss a payment. A missed payment is a serious default and can potentially be a black mark on your credit report, and that could make it very difficult for you to get any credit or loans in the future.
A fixed interest rate is lower on average, but there’s the risk that if the RBA cash rate goes down, you’ll miss out on a lower rate and end up paying more for your loan. A variable interest rates goes up and down with the RBA cash rate. Currently on the CANSTAR database, the average variable interest rate on a secured loan is 10.95%, while the average variable interest rate on an unsecured loan is 13.42%.
Be wary about introductory offers that start with a low interest rate but revert to a higher interest rate – you want to pay a competitive rate throughout the life of your loan. Treat cashback offers with caution and check that they?re not hiding higher overall fees.
If you picked a personal loan to consolidate debt with a lower interest rate, just cut up the offending credit cards and close those accounts.
You should obtain a copy of your credit report before you apply for a loan, to find out your credit rating and make sure you won’t have any nasty surprises. Your credit rating is the number that a financial institution looks at to decide whether or not you’re an investment risk. If you are rejected for a loan because you have a poor credit rating, this is a black mark on your credit history and will make it even harder for you to get credit or a loan in the future. You can order a free copy of your credit rating; You can choose from:
Have your paperwork ready to make the process easier when you’re applying for a loan. A financial institution will want you to provide:
You can use a personal loan to pay for a multitude of things – almost anything, in fact:
You should not take out a personal loan for projects or purchases that depreciate or that won?t bring you a positive financial return.
For example, it might make sense to take out a personal loan to make DIY home renovations to increase the resale value of your home by making it more modern or making it feel luxurious. In the same way, taking out a personal loan so that you can undergo vocational training or further study is sensible because the training is likely to increase the salary you receive from your current or future job.
However, using a personal loan for purchases or projects that won?t add value could be a mistake and could put you in debt because they give no positive return on your investment. This is an example of when a personal loan could be a type of ?bad debt?.
Please note that these are a general explanation of the meaning of terms used in relation to personal loans.
Policy wording may use different terms and you should read the terms and conditions of the relevant policy to understand the inclusions and exclusions of that policy. You cannot rely on these terms to the part of any policy you may purchase. You should refer to the product disclosure statement.
Account-keeping fee / Ongoing fee: A monthly account-keeping fee that is charged by the lender to help cover the administration cost of maintaining the line of credit. Alternatively, you may be charged an annual fee rather than an ongoing account-keeping fee, especially for rewards credit cards.
Additional repayments: Extra payments that you choose to make to your loan on top of the minimum required repayments. See extra repayments (below).
Annual Percentage Rate: The total charge for the loan including fees and interest. This rate is expressed as a percentage so that you can compare rates across the market.
Application Fee: A fee charged by some lenders for the service of arranging and processing your loan application.
Asset: A resource that is controlled by a person because they own it or own an interest in it, and which will give them future economic benefits because of that ownership.
Automatic transfer: A system that is set up to automatically transfer money from a one bank account into another account at a certain point in time to coincide with bills or payments.
Balance: The amount remaining that has not yet been paid off on your loan. The opening balance is the balance of your loan at the start of a month or statement period. The closing balance is the balance of your loan at the end of a month or statement period, after all repayments have been taken into account.
Bankruptcy: This is when someone?s debt problems become so serious that they are unable to pay their existing debts and bills. When this happens, they can apply to a court to be declared ?bankrupt?, and any assets or savings they have can be used to pay off their debts. Normally after one year a person will be discharged from bankruptcy, but it will still have a negative impact on their credit rating and may stop them getting credit in the future.
Basis points: A basis point is equal to 0.01% interest. For example, 50 basis points is an interest rate of 0.50%.
Borrower: The person borrowing money in a personal loan from the financial institution. Also known as a debtor.
Car loan: A personal loan taken out to buy a car for private purposes. Also known as a vehicle loan.
Cash advance: Withdrawing cash from a line of credit such as a personal loan. Usually incurs additional fees or a higher rate of interest.
Caveat emptor: Latin for “let the buyer beware”.
Comparison rate: A rate that represents the total annual cost of the loan in a single figure, including the interest rate, payments, and most of the ongoing and upfront fees and charges. On the Canstar website, all comparison rates for personal loans are based on a $10,000 loan over 3 years.
Consumption loan debt: Debt for personal loans for things that are either fully used immediately or depreciate in value from the time they are bought, including holidays, hire purchase, cosmetic surgery, furniture, furnishings, and other goods and services. Consumption debt does not include loan debt for property, business, investment, unpaid overdue bills and fines, and court-ordered damages payments.
Credit report or credit history: A report from a credit agency that contains a history of your previous loan and bill payments. Banks, lenders, creditors and financial institutions use this report to determine how likely you are to repay a future debt and whether or not they should lend money to you. Lenders can record a default on your file if you make loan repayments late. Every application for finance that you make is recorded on your file showing the lender you applied to, the type of finance, the amount and the date. Find out more about what is included in your credit report here.
Credit score or credit rating: A numerical score that represents the credit-worthiness of an individual or corporation, based on their positive and negative borrowing and repayment history. Your credit score is affected by whether you pay your bills on time, your current level of debt, the types of credit and loans you have, and the length of your credit history. Your credit score and credit report are used by lenders when deciding whether or not to lend to you, and are also used by lenders and insurers to set your loan and insurance rates. Find out how to check your credit score here.
Creditor: A lending agency to whom you owe money. Also known as a lender.
Current Rate: The rate advertised by institutions, not including fees, discounts and special offers.
Debt: Money owed by one person (the debtor) to another person or financial institution (the creditor). Requires a contract between them requiring the debtor to pay back the money. A debt is also known as a liability.
Debt consolidation (consolidation loan): When you take out one loan to pay off multiple other loans. This is often done to secure a lower interest rate, secure a fixed interest rate, or for the convenience of paying off only one loan instead of many loans.
Debtor: The person taking out the loan. See borrower (above).
Default: When a cardholder fails to fulfil their obligation to make the minimum required payments on their loan. Defaults are a serious black mark on your credit report and negatively affect your credit rating.
Drawdown: A drawdown is when a lender ?draws down? the loan from their funds into your bank account, and you use the money. Interest typically starts being charged from the date your loan funds are drawn down into your bank account.
Drawdown Date: The date on which you first use the money loaned to you.
Equity: Where you have borrowed money to buy an asset, equity means the difference between the value of the asset and how much you still owe on it. This is known as a ?residual claim to ownership?. For example, when an owner buys a car with a loan for $10,000 and has repaid $6,000 so far, the owner has equity of $4,000 on the car.
Extra repayments: Some personal loans allow you to make extra payments earlier than the minimum required repayments, meaning you could pay off the loan sooner and lower the total you pay in interest. Usually only available with variable rate loans. Also known as additional repayments.
Fixed rate: A loan that lets a borrower “lock in” a particular interest rate for a period of time. During that time period, you pay the same interest rate every month in your repayments, regardless of whether the RBA official cash rate goes up or down. At the end of the fixed rate period, the loan will revert to a variable rate unless the lender and borrower agree to another fixed rate. Some loans have a fixed rate for their whole lifetime.
Guarantee: An undertaking or promise to pay an amount of funds if the borrower fails to meet their required repayments or breaks their loan contract in another way.
Interest in advance: When interest payments are charged at the beginning of a period. Usually only available with fixed interest loans.
Interest in arrears: When interest payments are charged at the end of a period.
Interest rate: The rate at which the outstanding balance of your loan increases per month if it is not paid or not paid in full.
Lender: The financial institution offering the loan. Also known as a creditor because they are offering an amount of credit.
Loan: An amount of money borrowed by one person from another person or financial institution. The amount must be repaid, and interest is charged on the amount until it is fully repaid.
Loan approval fee or approval fee: A fee charged when a loan is approved by a lender, to cover the lender?s costs from document searches, valuations, and loan processing.
Maximum loan amount: The maximum amount that you can borrow from the lender under the loan agreement.
Minimum interest charge: The minimum amount of interest you would be charged if you are charged any interest. For example, if your total interest charge is $0.75 but the bank?s minimum interest charge is $1.00, you will be charged $1.00.
Minimum loan amount: The minimum amount that the lender will require you to borrow from them under the loan agreement.
Minimum repayment: The amount listed as the minimum interest and repayment your bank requires you to pay off your loan for that month.
Ombudsman: If you have a dispute with your bank and haven?t been able to resolve it through the bank?s internal complaints resolution process, you can contact the Financial Ombudsman Service of Australia. It is a free and independent service that helps people resolve disputes with their bank or other financial institution. Anyone can call them on 1300 78 08 08.
RBA cash rate: The overnight interest rate that the Reserve Bank of Australia offers financial institutions to settle-up on inter-bank transactions. This cash rate influences the interest rate that banks give each other.
Redraw: A loan feature where the borrower can withdraw funds they?ve already paid, if they are far enough ahead on loan repayments. The redraw feature is not available on all loans.
Refinancing: Paying off an existing loan and establishing a new one.
Repayment holiday: A borrower who is ahead on their payments can apply to have a period of time where they make no repayments to their loan.
Secured loan: A loan where the borrower provides an asset as collateral or insurance for their debt. Because the loan is ?insured? by this security, secured loans usually have lower interest rates than unsecured loans.
Study loan debt: Debts taken out with the government in order to study, including the Higher Education Loans Programme (HELP), the government education payment scheme, and other government higher education schemes. Also includes study debts incurred prior to 2005 under the Higher Education Contributions Scheme (HECS) and the Student Financial Supplement Scheme (SFSS).
Universal default: When one financial institution treats a lender as if they had defaulted when the lender defaults with a different institution.
Unsecured loan: A loan where the borrower does not provide any asset as collateral or insurance for their debt. Because the loan is not ?insured? by any security, it is a higher risk, so lenders charge higher interest rates than secured loans.
Variable rate: An interest rate that changes when the official cash rate set by the Reserve Bank of Australia goes up or down. Changes in the interest rate change how much your loan repayments will cost each month.
According to 2015 research by Barclays Bank, Australia has the most household debt (mortgages, credit cards, personal loans, and overdrafts) of any country in the world.
A recent survey of almost 8,000 adults by Canstar Blue found that loan repayments were the biggest financial concern for 13% of respondents. Other main causes of financial stress were the cost of electricity (29%), and healthcare and medical payments (16%). In 2015, 37% of Aussies surveyed by Canstar Blue said dealing with money is stressful and overwhelming.
Are you debt-stressed? The ABA’s Doing It Tough website lists the following as signs that you might be in debt to a stressful point:
If you are in a stressful financial position because of debt, don’t panic. Whether you?re running a busy household or running a nation, it’s all about managing and paying off your debt.
If any of the debt-stressed signs apply to you, or you know your debt is out of control, take control of it now using the following steps:
The first step should always be to try to negotiate smaller monthly repayments or a lower interest rate with your loan provider. If they refuse and you think they are being unfair, you should contact a free external dispute resolution scheme. Your lender will belong to one of these two schemes:
If you don’t feel confident to talk to your lender on your own, you can contact a free debt management service such as Christians Against Poverty Australia. You should also check out the information from the Australian government on the MoneySmart managing debt website and the services available from Financial Counselling Australia.
Face up to your problems. List all of your debts – credit cards, personal loans, etc. – and record what interest rate you’re paying on your chunks of debt. Add it up into one lump sum you need to pay off.
Work out how much you can afford to repay each month. Develop a plan, sit down and write out all of your weekly expenses. Try our personal loan repayment calculator to put an affordable plan in place and our budget calculator to put a great overall budget in place.
Consolidate your debt. Check out what interest rates are on offer and put the whole debt into one balance transfer, one personal loan, or one low rate credit card.
Lenders see a spike in personal loan applications in January and February from borrowers wanting to consolidate debt built up over the Christmas holidays.
If you choose a personal loan to consolidate your debt, do your research and look for a fixed rate loan, so that you can budget to pay the same amount off your debt every month. You’ll want a loan with a low interest rate, and probably over a longer timeframe so that you can afford your monthly repayments. Remember to check for hidden fees.
Switch to cash. Take your credit cards out of your wallet to avoid impulse spending that is not in your budget.
Make extra repayments as often as you can. This gives you a buffer, so if things are particularly tight one month and you need to make a smaller payment, you won’t be hit with a missed payment penalty.
If you can’t pay your debt off, don’t have any savings – use those savings to pay off your debt. Don’t invest in anything, as this adds the risk of losing more money.
Be patient, as it will take time to pay off your debt. Don’t change your actions or make any sudden splurges until your debt is completely gone. Pay your loan off.
Readers experiencing severe financial hardship can seek independent and free advice from Financial Counselling Australia. You can use their free Debt Self Help Online Assessment Tool to get an assessment of your debt situation straight away, or contact any of the financial counsellors listed on their website. You can also phone their financial counselling hotline on 1800 007 007 for free from a landline, 9:30am to 4.30pm, Monday to Friday.
Another organisation that provides independent and free financial help, from consolidating your debt to dealing with creditors and keeping debt collectors away, is Christians Against Poverty Australia. You can call their helpline on 1300 227 000 or find a centre near you.
Don’t be fooled by other businesses offering services to help you get out of debt, as some of them charge fees and are little more than debt consolidation companies. Always find out up front how much a debt company will charge you for their services. You can often get the same help for free from a financial counsellor.
In 2014, CANSTAR analysed 265 Personal and Car Loans from 73 financial institutions in Australia. We analyse over 100 parts of a product, including the product parameters, flexibility, and terms and conditions. All ratings are re-assessed every year.
We assess three categories of personal loans:
We compare personal loans within those three categories according to characteristics including the following:
The personal loan providers we rate are listed on our personal loan comparison website. The following list is current as at August 2015: