Personal loans are definitely not a one-size-fits-all product. There are actually a few unique sorts of personal loans you can use for various circumstances.
Personal loans can be helpful for a wide scope of things: Whether it’s paying for a holiday, a wedding, financing home renovations, paying off debts or borrowing for education or medical purposes, a decent personal loans can give you admittance to cash straight away without putting something aside for it.
A personal loan allows you to borrow cash to pay for something uniquely amazing, similar to a holiday, car or home renovations. You need to reimburse it with interest over a fixed term, normally somewhere in the range of one and seven years.
Getting the best deal on a personal loan can save you thousands in interest and charges.
In order to help you get the right personal loan, we’ll explain each of the different types of personal loan products below, as well as:
Fixed vs variable personal loans:
Personal loans can likewise accompany either fixed or variable interest rates: A fixed loan implies your interest rate is secured for the term of the personal loans, while a variable personal loan implies your interest rate can change on the impulses of your moneylender or developments in the more extensive market.
Either a fixed or variable rate loan might work better contingent upon what you’re involving the cash for. Fixed loans may be better for big buys as you can have more structured repayments, however a variable personal loan could be the better answer for a more modest loan sum, as to pay off rapidly.
Personal loans vs car loans:
Technically, personal loans and car loans are the same thing, with a car loan just being a personal loan used to finance the purchase of a car. Most car loans are secured, as cars are a high-value asset, meaning the majority of loan options for cars out there will require you to offer the car as collateral on the loan.
A smaller number of car loans are unsecured, meaning you don’t have to use anything as security. These unsecured car loans tend to charge much higher interest rates compared to secured ones on average. A quick scan of the market shows a typical low secured car loan interest rate is around the 5% p.a mark, while an unsecured loan might be a bit higher, around 6.50% p.a, on the lower end of the market.
Personal loans vs credit cards:
While personal loans are fixed amounts borrowed at an interest rate, credit cards give you a revolving line of credit, up to a specified limit and usually at a higher interest rate.
Credit cards can be more useful for paying bills and everyday spending (just don’t overspend with them) as they can often come with handy rewards programs and benefits, and they also allow you to clump multiple different payments together into one monthly bill. Personal loans, on the other hand, might be better suited to making larger one-off purchases, as you can find out exactly what you’ll need to repay beforehand and reduce your risk of going over-budget.
Personal loans vs P2P lending:
Peer to peer lender (P2P) loans are a viable alternative to personal loans. Unlike personal loans, which involve going to a bank or lender for a loan, P2P lending allows you to access a tier-based pricing system for loans from a marketplace. One person or business borrows money for an amount of interest, and another person supplies the money, getting some interest in return.
Personal loans vs payday loans:
Although they share some similar characteristics, payday loans and personal loans are very different. Often referred to as ‘debt vultures’ and ‘predatory lenders’ by regulatory bodies, payday loans allow you to borrow small amounts of money (usually up to $2,000 but sometimes up to $5,000) that must be repaid within 16 days to 12 months. While that might not sound too bad, payday lenders compensate for not being able to charge interest by charging higher fees instead.
Personal loans charge lower interest rates and fees compared to payday loans and also allow for longer time frames for repayment, usually up to several years. While personal loans can be useful in many situations, you need to be careful with payday loans and should generally avoid them.
Different types of personal loans
Generally speaking, you can get the following personal loans from most mainstream banks and lenders, as well as those smaller businesses that exist specifically to offer personal loans
Secured personal loans
Usually the more common type of personal loan, a secured personal loan is a type of personal loan secured against something you own, and can even be the thing you’re borrowing for. By this, we mean you put up something you own (like a car) as collateral in case you can’t meet the repayments. Should you default on the secured loan, the lender can seize this asset and sell it.
You can get more favourable rates and fees with secured loans because by having an asset as security on the loan, the lender may deem you to be less of a risk…
Unsecured personal loans
The opposite can be said for unsecured personal loans, which, as the name suggests, do not require you to put anything up as collateral. You can still take out the loan, but unsecured loans tend to charge higher interest rates and higher fees compared to unsecured loans. Plus, the lender can still take legal action against you if you default on the loan, so failing to meet the repayments isn’t consequence-free.
On the plus side, unsecured loans are often easier to get and still have lower interest rates than most credit cards.
Overdrafts
Overdrafts are a kind of line of credit you attach to your regular transaction account, to cover for unexpected expenses. Essentially, it acts as a temporary increase to your bank account balance, and although overdrafts do charge interest, they often only actually charge interest on what you use in any given month. Overdrafts usually only start working when you go below $0 in your account and will go up to a specified limit. Overdrafts can also charge establishment and ongoing fees, which you should check before you start using one. Even though overdrafts can technically be used for non-emergency purchases, you should probably consider other options first, and if you find your bank balance regularly going negative, you should probably review your spending habits and do up a new budget.
Line of credit loans
Perhaps the most similar to credit cards among all these products, a line of credit is essentially a pre-agreed borrowing limit that you can use at any time, and you’re only charged interest on the funds you actually use. For example, if you have a line of credit of $10,000, but only use $5,000, then you’d be charged interest on $5,000.These usually have higher interest rates than other types of personal loans but can be more convenient, as you have access to your funds whenever you need them.
Debt consolidation loans
A debt consolidation loan is a type of personal loan (or a home loan) that allows you to combine your other debts, such as credit card and car loan debts, into a single loan, so you can pay your combined debts off in a single, hopefully lower-rate place.
Student & guarantor loans
These are a kind of loan available only to students in Australia to help them pay for things that help them study, which could be things like textbooks or a new computer, or something like a car to help them get to and from university or TAFE. These loans are available from many lenders and banks to Australian residents over 18, helping students avoid paying for such things upfront and can be deferred for up to five years if necessary. Some banks don’t charge application fees for student personal loans, but interest does start accruing from the date you take out the loan. For a student on a low budget, this could quickly become unaffordable.
If you think you might have trouble meeting the repayments, most banks and lenders that offer these loans allow you to apply with a guarantor, like your parents or a guardian. Having the security of a guarantor on hand can also give you access to lower than average interest rates as well as some lower fees in some cases.
Paying off your loan
Make sure you have enough in your bank account to make repayments when they’re due. If you don’t, you’ll be charged a missed payment fee.
Preparing a budget is a great way to stay on top of loan repayments. It can also help you plan for extra repayments to pay off the loan faster.
Before you start making extra repayments, check if there’s an early exit fee.