Personal loans – a world of choice
The personal loan market is changing – for the better and borrowers are enjoying better products, lower interest rates and more choice than ever before. New entrants to the personal loan market are shaking up the big banks and traditional credit unions. Personal loans are no longer ‘one size fits all,’ inflexible products.
What is a personal loan?
A personal loan is traditionally the first type of credit many young people have. A personal loan is often used to buy a car or pay for a single large expense. Unlike a credit card, a personal loan usually must be repaid within a fixed term. Unlike a mortgage, a personal loan is not secured by real estate property, but can be secured against a valuable item, like a car.
A personal loan usually has a lower interest than a credit card, and a higher interest rate than a home loan.
What are the different types of personal loan?
The personal loan market is changing, rapidly, and new types of loan are attracting borrower interest. Here are the main types of personal loan that you need to be aware of:
Unsecured personal loans are not backed by a car or other ‘collateral.’ They are good for paying for a holiday, debt consolidation or other large expenses.
Secured personal loans have a lower interest rate because if you don’t repay them, the lender can repossess the security
Car loans are secured by a car and have a low interest rate. Loans for newer and more valuable cars are likely to feature lower interest rates than loan approved for older or less valuable cars.
Overdrafts operate as a line of credit on your bank account, letting you overdraw the account. These have similar features to a credit card. There is no set time frame for repaying the debt but you will be charged interest while the overdraft is active.
Debt consolidation is a popular purpose for personal loans. A debt consolidation personal loan makes sense if you have high interest consumer debts. A debt consolidation personal loan can lower the overall interest paid and help you set an end date on your debt.
A new type of loan in the market are ‘peer to peer' personal loans. These loans are funded by savers and investors looking for a better rate than a bank or credit union account. A peer-to-peer personal loans cuts out the bank in the middle and offers borrowers a rate based on their risk profile and credit history.
Peer to peer lenders like RateSetter and SocietyOne are shaking up the personal loan market with a new way of lending.
Line of credit personal loans are available from Citi and other lenders. These combine the flexibility of a credit card and the regular repayments of a personal loan.
Beware of borrowing small amounts of money from ‘payday’ lenders, often operating online. The Australian Securities and Investment Commission, the Australian Competition and Consumer Commission and consumer groups have warned borrowers that these personal loans feature extremely high interest rates, fees and charges.
Compare your personal loan options today.