There are many loan types available in Australia, thanks to a plethora of lenders operating in the consumer finance industry. Selecting an appropriate loan can be a daunting task, especially when funds are required on an urgent basis. Applying with multiple lenders for a loan at the same time is also not a good idea since it can have a negative impact on your credit score.
Finding a suitable loan depends upon various factors, but the most important factor is the borrower’s need. Australians take out a loan for a variety of reasons, such as to purchase a vehicle, consolidate debt, travel, purchase something very expensive, cover an unexpected cost, renovate their home, or for business purposes.
Tip: Once the need for a loan has been identified, it is time to select a loan type. To do this, it is important to know the various types of loans available in Australia. A loan facilitator like Viva Paydays can help you select the most suitable loan.
There are three major types of personal loans, and these may have subcategories as well.
- A Secured Personal Loan
Lenders offer secured personal loans by keeping an asset partially or fully owned by the borrower as collateral against the outstanding loan amount. Secured personal loans are suitable for those looking for car financing, or who own personal assets such as home equity that they can use as security for a loan. Also, secured loans are usually cheaper compared to unsecured personal loans.
- An Unsecured Personal Loan
Unsecured personal loans may be very useful to consolidate debt, or for any other expense provided that the borrower has no way of securitizing the personal loan.
- A Credit Line
A credit line is offered by a bank and usually has strict eligibility criteria. Borrowers with stable financial health and a sequential need for funds should opt for a credit line, as interest charges are applied only on the amount that is actually withdrawn over a specific period of time. Borrowers also have the freedom to withdraw as needed, up to the limit approved by the bank on the credit line.
Although car financing may fall under the category of personal loans, they are specialized loans given out specifically for the purchase of a vehicle. There are three major types of vehicle loans available in Australia.
- Car Loans
Car loans are given out by keeping the vehicle as collateral until the entire loan amount has been paid off. The loan amount is as much as the cost of the car, and lenders typically charge interest at a lower rate compared to a traditional personal loan.
- Used Car Loans
Not all lenders provide car loans for used cars, however, there are many lenders operating in Australia providing loans for used cars. These lenders evaluate the car’s worth and offer a loan against the car’s worth. The rate offered for used car loans might be higher compared to the rate applied on a new car loan since a used car has a higher probability of losing value due to age and hence poses a higher risk for the lender.
- Motorcycle Loans
Motorcycle loans are smaller compared to car loans, and lenders offer specialized loans for those wishing to obtain financing to buy a motorcycle.
Short-Term Loans And Bad Credit Loans
Those Australians who have a bad credit history might not be eligible for many types of loans. However, many short-term loan providers accept applications from those with a bad credit score.
Bad credit loans are usually capped at $2,000, although some lenders offer as much as $10,000. The loan term is usually under two years. Payday loans also fall under the category of short-term loans, however, they are among the most expensive loan options available in Australia and most payday loans must be repaid in full within a year.
Peer-To-Peer Loan Providers
Due to advancement in technology, many peer-to-peer lenders have emerged in the consumer finance industry. The peer-to-peer lending model acquires investment from Australians in exchange for a specified return and gives out this investment in the form of consumer loans to Australians in exchange for interest.
Peer-to-peer lending relies on technology to automate the loan provision process. Borrowers are typically offered an individualized rate based upon multiple factors, such as the requested loan amount, and the borrower’s credit history, income, expenses, outstanding loan obligations, and a few other financial factors.
Borrowers are then grouped into a portfolio according to their perceived risk. Naturally, lenders willing to invest in a portfolio of loans with a higher risk factor gain a higher return on investment.
What Is The Eligibility Criteria To Apply For A Loan?
Although the eligibility criteria set by lenders vary significantly according to the loan type, there are a few factors that are considered important to evaluate a borrower’s eligibility for a loan.
- Personal Factors
Applicants must be over 18 years of age, a permanent resident or citizen of Australia, and have valid contact information. Other factors may apply.
- Eligible Income/Expense Ratio
Applicants must prove sufficient regular income. Some lenders may require more than 50% of this income to come from sources other than Centrelink/government benefits. Also, applicants should have sufficient income left after paying off all regular expenses, as this proves affordability for the required loan.
- Outstanding Debt Obligations
If an applicant has multiple outstanding debt obligations, a lender may not approve their loan application due to high perceived risk.
- Credit Score/Past Financial Behavior
Many borrowers look at an applicant’s credit score as a core eligibility criterion while making the loan approval decision. However, there are many lenders in Australia, mostly short-term loan providers, that disregard an applicant’s credit history and focus on more recent financial health indicators to make a loan approval decision.
Availability Of Loans
While many lenders only have retail outlets to process a loan application, most are offering online loan applications now to make it easy for borrowers to apply for a loan. However, some lenders are only able to provide loans in limited regions of Australia, and hence borrowers should confirm whether their chosen lender provides loans in their locality before applying.