A personal loan is taken out for personal expenditure and is used to cover a shortage of funds caused by insufficient savings to pay for the necessary expenditure. Lenders in Australia are able to provide personal loans between the amounts of $2,000 to $100,000 for a period of up to seven years, and there is usually no limitation on the way this loan amount is spent by the borrower.
Hence, borrowers of personal loans use the loan amount to purchase a vehicle, renovate their house, consolidate their debt, to cover wedding expenses and a whole range of other expenses.
Tip: In return for providing a personal loan, the lender charges interest to the borrower. There are two types of interest rates quoted by lenders during the loan application process, including the advertised rate and the comparison rate.
The Importance Of The Comparison Rate
It’s simple. The advertised interest rate does not include any other charges applied by the lender on the loan, while the comparison rate includes all charges. This makes it easier to compare a lender with other lenders while selecting the best one.
Although the mechanism to calculate comparison rates may be different for each lender, they are still compelled by law to disclose the calculation methodology. This means that the lender must disclose the loan amount and loan term they have considered while calculating the applicable rate. However, comparison rates offer the most complete picture of all charges applied by a lender on a loan.
Choosing The Best Personal Loan Option
The following factors must be considered while selecting the best personal loan option.
- Does the borrower have a bad credit history?
If the borrower has a bad credit rating, they may not be eligible for a personal loan. In this case, a short-term loan might be available and it’s best to evaluate short-term lenders. However, short-term loans come with a high-interest rate and should only be sought to cover unavoidable expenses.
- Is the loan required to purchase a vehicle?
There are many car loan providers in Australia that specialize in offering loans for a vehicle. These lenders use the vehicle as collateral against the loan and, hence, are able to offer significantly lower rates compared to a personal loan.
- Does the borrower have equity in a home or own a car that can be used to securitize a loan?
A home equity loan, or a personal loan securitized against a vehicle, offers a cheaper rate compared to an unsecured personal loan.
- Is the required loan amount under $3,000?
Many personal loan providers offer loans that exceed this amount, hence borrowers might not be able to find a lender willing to offer personal loans under $3,000. In this case, a short-term lender might be more suitable.
- Does the borrower require funds over time, and not all at once?
A personal loan is charged interest and other charges on the entire outstanding loan amount from the day it has been taken out, which is not suitable for borrowers who require funds piecemeal, such as to cover an expense to be incurred over the next few months. If this is the case, then a credit line at a bank might be more suitable, as charges on a credit line are applied to the amount that is withdrawn, and not on the total amount of credit that has been approved.
Tip: If the answer to all of the above questions is in the negative, then borrowers should go for an unsecured personal loan as that might be the most suitable option for them.
How Much Does A Personal Loan Cost?
There are two costs that are applied by lenders on a personal loan: an interest rate, and other fees.
The interest rate can be of two types as well. It can either be fixed or variable, depending upon the lender or type of the loan. A variable interest rate keeps changing over the course of the loan term depending upon a few factors, whereas a fixed rate does not change. Typically, lenders apply a variable rate to loans that are taken out for a long term, while loans with a term of under 5 years are usually charged a fixed rate.
Also, the rate that is charged on a loan may be set considering the risk embedded in the loan. A secured loan would be cheaper compared to an unsecured loan, however, it may not be cheaper if the borrower has an excellent credit record and more-than-sufficient income.
As far as other fees are concerned, there are three that are typically applied by lenders on a loan: an upfront fee, a regular fee, and contingent fees if the borrower fails to honor the loan agreement. All of these fees are embedded in the comparison rate quoted by lenders, hence borrowers should use the comparison rate while evaluating different personal loan options.
The Eligibility Criteria
The following eligibility criteria apply to applicants of a personal loan, in the case of most lenders operating in Australia. The applicant must:
- Have sufficient income
Borrowers must be able to easily afford regular loan repayments as required under the loan agreement. Income generated through Centrelink or other government benefits may also be eligible up to a certain extent.
- Meet the credit score requirement as specified by the lender
Although some borrowers might still provide personal loans to applicants with a bad credit rating, they are likely to charge much more as well. It might be more suitable to apply for a short-term loan in this case.
- Not have too much outstanding debt
This includes debt accumulated on credit cards, mortgages, leases, or any other form of credit. However, having too much debt might not be a problem if the borrower has sufficient income to easily cover all debt obligations.
- Meet all other eligibility criteria as set by the lender
These typically include age, residential status, to name a couple. In some cases, a borrower may have sufficient income but might be ineligible to apply for a loan due to some other factor, in which case a guarantor loan may be the most suitable option to acquire a personal loan.