So, you need to borrow money for a major purchase. The good news is that there are plenty of options out there! The bad news is that, because there are so many options, deciding on the right loan for your situation isn’t so simple.
If you want to get the best deal and reach your goals sooner, here’s everything you need to think about before taking out a personal loan…
How Do Personal Loans Work?
A personal loan is a type of credit used to finance purchases. Say you want to renovate your bathroom or buy a new set of wheels. A personal loan will give you that upfront sum of money so you can get what you want sooner.
Personal loans are different from home loans and car loans. While the latter is generally tied to an asset and “secured”, unsecured personal loans don’t have the same sort of collateral.
You can usually borrow between $2,000 and $50,000 and the turnaround time for approval is generally pretty fast. To pay the money back, you’ll set a loan term of between six and 60 months, whatever suits your budget. So, you get to choose how much you want to repay and over how long.
Do You Need a Personal Loan?
Sounds easy so far, right? Well, now that you know what a personal loan is, it’s time to decide whether you really do need one.
As InfoChoice CEO Vadim Taube explains: “Personal loans are a quick way to obtain funds, usually available within 24 and 48 hours from application. They can also be used for almost any purpose and many are facilitated 100% online.” So, unsecured personal loans are a great option to consider if you need quick and convenient access to funds.
Personal loans aren’t the only option. You might want to consider if you can do some good old fashioned budgeting and save the money upfront.
If the benefits of having the funds sooner outweigh waiting to save, there are still some other options available. Alternatives include credit cards, home loan top-ups, and BNPL (buy now pay later, such as Afterpay) options.
Credit cards usually have a higher interest rate than personal loans and have a limit of the amount of credit available, meaning you may not be able to fund a car or other large purchases. The benefits of a credit card are not being restricted by your credit score and depending on the card, may come with other perks and benefits to consider.
Home loan top-ups allow home loan customers to use the equity they’ve built up to borrow additional funds ‘top up’, which can be used for various purposes. While it may be easy to arrange, there’s quite a lot to consider with home loan top-ups, such as the additional interest paid when you consider compound interest over the whole life of the loan.
BNPL has gained popularity in recent years by allowing customers to break down purchases into several repayments with little setup involved, but usually these have lower credit limits and are more useful for smaller purchases.
With a little bit of research and weighing up various options, you should know if a personal loan is right for you. Still interested? Read on…
How Much Will Your Personal Loan Cost?
An unsecured personal loan will cost you the principal loan amount plus interest. But, you should never just dive headfirst into a deal with the lowest interest rate. If you do, you could find yourself facing hidden fees that offset the benefits of your chosen loan.
Check to see if lenders charge an establishment fee, ongoing or account keeping fees, early payout fees or late payment fees. These are the main ones to consider, luckily you can check the comparison rate and get a quick indication of the true cost of the loan. The comparison rate is a great reference to check, it considers the interest rate AND any other fees attached to the loan to give you a more accurate representation of what you’ll be paying.
How to Find the Right Lenders?
Vadim tells us that, because there are so many products in the market, “you should always deal with an industry-recognised, award-winning institution“. Go with a credit provider without a good reputation and you leave yourself open to unpleasant surprises.
Comparison sites are a great place to start to get a gauge of the options available and what they can offer you.
What Is Your Credit Score?
Love them or hate them, credit scores are kind of a big deal. So, before you take out a new personal loan, it’s worth knowing yours.
Vadim says that “many personal loan lenders reward good borrowers with reduced interest rates and minimal or no fees”. However, if you have a history of missed payments or various other debts on the go, your options will be more limited.
If you have the time to spare, you can try and improve your credit score before you apply. By giving your credit score a makeover, you’ll become much more attractive to lenders which will give you a nudge towards a better rate.
Gearing up to apply for a personal loan can sometimes feel like a game of 20 Questions. Still, all these questions are more than worth asking. In the right circumstances, a personal loan can be a really useful credit option!
For one thing, they can help you get what you want sooner. For another, there are plenty of options, so you have a good chance of finding one that suits your circumstances.
Content brought to you by Alex Bank
The content on this page is general information only, it is not intended to be advice or a substitute for professional financial advice. It does not take into account your situation, needs or objectives, you need to consider whether it’s appropriate for your situation and if you should consult professional advice. You should assess whether an Alex Bank personal loan is the best product based on your needs and situation and read the fine print, terms and conditions and compare different personal loan products on the market or seek professional advice.
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