5 things to consider when comparing personal loans
When it comes to personal loans, there’s no one-size-fits-all option. Different loans will suit different situations, and the right loan for you will vary according to your personal circumstances.
Taking the time to compare different types of loans will help to ensure you find your match, as will considering answers to these five simple questions.
1. Are you looking for a large or small loan?
If you’re hoping to borrow a significant amount of money, a secured loan may be a good option. Putting up an asset as security may help to increase your borrowing power or allow you to take advantage of a lower interest rate.
If you’re looking to borrow a smaller amount of money – perhaps for a holiday, a household purchase or to consolidate some debts – you might opt for an unsecured loan. It’s important to note that the interest rate is typically higher with unsecured loans.
2. Do you want flexibility with payments?
A bonus at work, a tax rebate or a month of overtime might present opportunities to make some lump sum payments towards your loan. If you’d like this to be an option, make sure you check what, if any, fees there are for additional payments.
Similarly, if there is a possibility that you might want to pay the loan off early, take the time to compare loan exit fees to ensure this is a viable option.
3. Are you prepared for the overall cost of the loan?
In addition to the amount you’re borrowing, you will need to consider the fees and interest charges over the lifetime of the loan.
The best way to get an indication of the full cost of a loan is to look at the comparison rate. This is more accurate than the interest rate because it encompasses both interest and fees.
4. Do you love to budget?
If budgeting is important to you, it may be worth looking into a personal loan with a fixed interest rate. That way, you’ll always know what your repayments and interest charges will be and will be protected against interest rate increases. However, you may miss out on potential savings if the official cash rate drops.
A variable interest loan will change in accordance with the market. If your loan is linked to the official interest rate, this may work in your favour in the event of a rate decrease. On the other hand, if the official interest rate rises your repayments could too, and some people may find this option makes budgeting more difficult.
5. How long will you need to pay off your loan?
Loan terms vary considerably – you could choose a loan term from one year to seven years, depending on your requirements. While giving yourself a longer period to pay off the loan might lower your repayments, remember the interest being charged over that time could significantly increase the overall cost of the loan.
Having a good understanding of how and when you’d like to pay off your loan can help you decide on a product that meets your needs. Think realistically about your finances and goals, and always compare personal loans so you don’t end up paying too much.