What are the best ways to borrow money?

TAMIKA SEETO
If you need to borrow money, there are a few different options that might be available to you. We explore some of them below.

If you are facing a big or unexpected cost and don’t have enough cash at hand, you might be considering borrowing money to help pay for it. So what options do you have? And what is the best way to borrow money in terms of overall cost?

We take a closer look at:

Remember that your ability to borrow money will depend on your personal circumstances, including your income and credit score. Your credit score, whether good or bad, can impact the interest rate you are offered on a loan, and there are steps you can take to improve it if you need to.

Personal loans

Personal loans are typically used to pay for big expenses such as buying a car, home renovations, holidays and weddings. You will be charged interest on the loan (which can be either a fixed or variable rate), as well as various fees. This may include establishment, monthly, missed payment and early repayment fees. Personal loans need to be repaid within a specific period or loan term, which typically range from one to seven years. To pay off the loan, you’ll need to make regular weekly, fortnightly or monthly repayments.

What is the average cost of a personal loan?

Unsecured personal loans currently have an average interest rate of 11.03% and an average application fee of $206, according to Canstar’s research. The average ongoing fee is currently $105, but only 28% of providers on our database charge this fee. These calculations are based on a $10,000 loan with a five-year term. If you take out a loan with a longer term, you will typically pay more interest over the life of the loan.

Possible advantages of a personal loan:

  • Personal loans are repaid over a fixed term, so you have a set timeline for when your loan will be paid off.
  • If you choose a fixed-rate personal loan, your repayments will stay the same over the loan.
  • Based on Canstar’s analysis, the average personal loan interest rate is lower than the average credit card interest rate.

Possible disadvantages of a personal loan:

  • You will be charged interest and fees.
  • You can’t increase the loan amount.
  • You need to be borrowing money for a specific and approved purpose.

Credit cards

A credit card lets you access money up to an approved limit, provided you make the minimum repayment each month. Credit cards usually come with an interest-free period on purchases (such as up to 44 or 55 days). But if you don’t repay your credit card’s closing balance by the due date, you will lose the interest-free period and will be charged interest on your outstanding balance. You may also be charged an annual fee and other fees such as late payment fees, cash advance fees and international transaction fees, depending on how you use the card.

What is the average cost of a credit card?

Credit cards currently have an average interest rate of 16.63% and an average annual fee of $91, according to Canstar’s research. This is based on personal credit cards in Canstar’s database and excludes the few 0% interest credit cards.

Possible advantages of a credit card:

  • You can take advantage of interest-free periods and potentially pay no interest on purchases.
  • You have the flexibility to access funds as you need it (up to your approved limit).
  • Depending on the credit card you choose, you may be able to get extra perks such as frequent flyer points. Some credit cards also include insurance such as purchase protection insurance, extended warranty insurance and travel insurance.

Possible disadvantages of a credit card:

  • You will be charged interest if you don’t repay your full closing balance by the due date. Credit card interest rates are typically higher than other types of credit.
  • You may also be charged fees, such as annual fees.
  • You are only required to make the minimum repayments, so you need to set your own clear plan to pay off your credit card debt.

Overdrafts on bank accounts

A personal overdraft is linked to your transaction account and lets you access extra funds (up to an approved limit) if your account balance drops below zero. You are charged interest on the amount you use (rather than the entire limit) and may be charged fees such as application and monthly administration fees. Overdrafts usually have no set minimum repayments. However, you should try to repay the amount you have borrowed as soon as possible to reduce interest and fees.

What is the average cost of a personal overdraft?

Overdrafts currently have an average interest rate of 13.28%, according to Canstar’s research. There are currently 41 transaction accounts in Canstar’s database that have an overdraft facility.

Possible advantages of an overdraft:

  • Personal overdrafts can be useful in emergency situations and allow you to access funds as you need it.
  • A personal overdraft is connected to your transaction account, so you can easily access the funds, including from your debit card.
  • You have the flexibility to choose when you make your repayments.

Possible disadvantages of an overdraft:

  • You will be charged interest on the amount you borrow and you will be charged fees.
  • You can only borrow money if you have no money in your linked account.
  • You don’t have to make minimum repayments, so you need to be disciplined with making repayments and paying off the amount borrowed.

Line of credit home loans

Although it won’t be an option for everyone, another way to borrow money is through a line of credit home loan. A line of credit home loan allows you to borrow money using the equity in your home. Like a credit card, you can access money up to an approved limit and you don’t have to apply each time you want to borrow money. You will be charged interest on the amount you use and you may be charged fees. Some lenders will let you make interest-only repayments or let the interest be added to your home loan (capitalised) up to your approved line of credit limit.

What is the average cost of a line of credit home loan?

Line of credit home loans currently have an average interest rate of 4.82% and an average application fee of $283, according to Canstar’s research. This is based on equity mortgages available for a loan amount of $500,000 with 80% LVR and principal and interest repayments.

Possible advantages of a home loan line of credit:

  • Line of credit home loans have lower interest rates compared to other forms of borrowing.
  • You have the flexibility to access funds as you need it (up to your approved limit).
  • You may have the flexibility to choose how you make your repayments.

Possible disadvantages of a home loan line of credit:

  • You will be charged interest and fees.
  • If you make interest-only repayments or if interest capitalisation is applied, you may end up paying more in the long term.
  • Line of credit home loans can have slightly higher interest rates than standard home loans.

Remember that the ‘best’ way to borrow money will really depend on your own situation. Factors like your credit score can impact your borrowing options and the interest rate you are offered.

Additionally, some ways of borrowing money may be seen as more positive than others. For example, borrowing money to purchase a home may be considered ‘good debt’ as your home may grow in value over time. In comparison, taking out a credit card or personal loan could be considered ‘bad debt’ if what you purchase won’t go up in value. Carefully consider what you are borrowing the money for and make sure you have a solid plan in place to repay the funds.

Cover image source: Gordon Bell/Shutterstock.com


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