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Why get a loan?

While we’re big on finding ways to grow your funds through savings accounts and term deposits, Mozo also understands major purchases can’t always be covered by the savings grind and interest returns. Cue a loan. Your financial situation - how much you earn, spend and have the capacity to save - and your credit history can affect how much you can borrow, who you can borrow it from, and what interest rate might be applied to the loan. 

Types of loans offered in Australia

• Home loans

This is the big one. The Everest of loans. Committing to a loan that sits in the six-figure zone can be daunting, but like any other purchase, organising a home loan simply requires you to assess what you need against the available options. 

For home loans, this involves three broad elements:

• The first is comparing lenders based on the interest rate they’ll apply to your loan, which is the biggest factor in the cost of a loan compared to one-off and on ongoing fees. 

• Next is assessing your eligibility, which comes down to the deposit you have compared to the amount being loaned (known in the biz as the ‘loan to value ratio’ or LVR), your income, and your assets and liabilities. 

• And finally, what kind of home loan applicant you are - an investor or an owner occupier looking to start paying off the loan principal and interest, or solely the interest on the loan. 

You’ll also need to take into account the money-saving features of the home loan, including extra repayments, redraws and offset accounts. Mozo updates its database of more than 500 home loans from 80-plus lenders daily.

• Personal loans

Welcome to the Narnia's wardrobe of loans. While they’re often used for things with big up-front costs like holidays, cars, weddings, home renos or debt consolidation, personal loans can be funneled into any item or activity. They are generally lower amounts than a home loan, with lump sums of around $2,000 to $100,000 often paid off in installments (plus interest) between 1 - 7 years. 

As well as debt consolidation loans - which help you get out of debt by combining everything you owe into one loan to save on interest costs - there are also secured and unsecured loans (read more in the FAQ). Across all these loan options, you should consider whether the loan interest rate is fixed or variable, if there are options for extra repayments and redraws, how your credit rating affects personal loan interest rates, and how the frequency and size of your repayments fit into your budget. Mozo is constantly monitoring over 200 personal loans from more than 70 lenders.

• Car loans

Car loans, as you’d expect, are personal loans you take out to buy a motor vehicle. There are many options offered by banks and other lenders, as seeking funds to purchase a new or used car is a common endeavour for Australians. The comparisons and considerations you’ll need to make are similar to most personal loans: a fixed versus variable interest rate, a secured or unsecured loan, and whether there are options to make early/extra repayments or redraws without repercussions. For new and used cars, Mozo compares more than 180 car loans from over 70 lenders.

• Business loans

You guessed it: business loans assist you in setting up, running or growing a business. This includes everything from purchasing equipment and hiring new staff to buying stock, paying wages and settling invoices. Like other loans, they come with the standard interest rate, security and fee considerations, but these vary considerably depending on your business size and needs - you may be after a few thousand dollars or something with six zeros to achieve your business goals. 

Flexibility in repayment periods, additional repayments and redraws should be high on your list, as, unlike earnings from standard 9-5 employment, your cash-flow is often dependent on seasonal changes and more unpredictable impacts on business activity. You’ll also want to keep a close eye on the rates you’re comparing, as some fintech lenders express rates fortnightly or monthly rather than per annum (as is the case for most other loans) and some will scrap a rate altogether and calculate a sum based on your particular business circumstances. No matter your business size or function, Mozo’s got you sorted with assessments of over 40 business loan comparisons from banks and other lenders. 

How to apply for a loan and tips for getting approved

There’s a forest’s worth of branches to this question, but luckily Mozo has dedicated guides detailing the best way to secure a home loan, personal loan, car loan or business loan. Before you get stuck into those, here are a few general rules and tips which apply to all the different loan types.

• Know your budget. This ensures you know how much money you need as a loan and what it’s for, then helps manage your capacity to pay it back by determining the portion of disposable income you can commit each repayment period.

• Deposit what you can. Especially for larger loans, having a nest egg ready to invest will bring you good fortune. Having a lower LVR means you have a greater equity in the purchase and will be paying less in interest in the long run. Happy days.

• Flexible features are fab. When you’re choosing any loan, the interest rate, while extremely important, isn’t your only consideration. You should always investigate other loan features. Will your provider let you make additional repayments when you can without a fee, thus paying off your loan quicker and reducing your paid interest? Will they let you make fee-free redraws on the loan if push comes to financial shove? Can you pay in line with your own salary for convenient cash-flow? Are there any ongoing maintenance fees? 

• Your credit score will come into it. Whether you're buying an investment property or a secondhand car, your past and current loans, credit card repayments and any lingering debt may influence the interest rate you are offered on the loan, or even get you knocked back by lenders. Similarly, having no history to speak of can also impact your eligibility for a loan. Bone up on the ins and outs of the credit with our guide to credit scores, files and history.

• Get your documents in order. This includes things like official identification, proof of employment and residence, and other lines of credit that are available to you. But before you begin the process and have lenders performing credit history checks, start by assessing your eligibility for different loans using Mozo’s Rate Matcher tool.

What are common loan fees?  

Fees. Nobody likes ’em but sometimes they’re unavoidable. Keep an eye out for these fee types in your loan, and preferably opt for one that doesn’t feature too many.

• Upfront or application fees are what it says on the packet: a charge incurred when you apply for the loan. 

• Valuation fees can occur when applying for home loans or business loans. In the case of a business loan, this is generally to assess the value of an asset that you’re putting up as collateral for a secured loan, whereas for a home loan it is to confirm the value of the property you are buying or selling 

• Break cost fees might come out to bite when you refinance a fixed rate home loan or switch to a new lender, or if you decide to pay out early on your fixed loan. Why? Lenders don’t want to be totally out of pocket after losing big bucks on what would’ve been the ongoing interest repayments.

• Late payment fees are avoidable by monitoring and meeting your repayment schedule.

• Ongoing service fees, be they monthly or annually, can add up to a considerable amount if you’re paying off a chunky loan across decades. 

• Extra repayment fees, which can be charged if you choose to make an additional deposit into your loan when you have the available funds. Many providers are scratching them to meet consumer demand for loan flexibility.

• Redraw fees can hit your wallet when you need to take a sum out of the loan to keep cash flowing. Again, more flexible lenders can let this fee slide.

Money-saving loan features, what to look for. 

From refinancing with a lender offering a better rate to avoiding late repayment fees, there are a heap of things that’ll help you save tonnes while you pay off your loan. But there are two you’ll want to keep your bargain-hunting eyes peeled for when applying for or switching loans.

• Offset accounts

This feature relates to home loans and is also known as a mortgage offset. Put simply, it’s a standard bank account from your home lender where you can deposit your income, set up debits for bills and use a debit card for all your usual transactions. The only difference to a regular account is that this is linked to your home loan. 

What’s the benefit in this? If you have a lump sum of say $20,000 in that account, and a mortgage of $300,000, the interest paid is offset by that bundle, so you only pay the interest on $280,000. If you have savings, you’ve got to store them somewhere, so this is a great option for homeowners. 

• Free extra repayments

The concept of getting charged for paying back a loan quickly may seem a little odd at first, but when you put yourself in the shoes of the bank, it becomes clearer. The bank wants you to take your time chipping away at a loan so they can eek out as much profit in interest as possible. 

So, many loans will have built-in fees for repaying additional amounts on top of the standard repayment schedule. You’ll likely see this more in fixed loans, which often restrict additional repayment amounts during the fixed term and may charge a fee. Most variable loans won’t have these conditions.

If you’ve got the extra money and the right kind of loan, avoiding these fees is a great way to save in the long run. You’ll also want to look into any break cost fees connected to fixed loans, to make sure you’re not penalised for finishing up the loan term early through extra repayments.

How is Interest calculated on loans? 

The principal amount (the lump sum you’re borrowing), the term of the loan, repayment amount and schedule will all come into play when you’re calculating the interest on a loan. The maths will also differ between repayments that consider the loan principal as well as interest, compared to interest-only repayments. So let’s break it down.

Steps to calculate loan principal and interest repayments

• Step 1: Divide your interest rate by the number of payments you’ll make in the year (interest rates are expressed annually). If you’re making monthly payments, divide by 12.

• Step 2: Multiply it by the balance of your loan, which for the first payment, will be your whole principal amount. This gives you the amount of interest you’ll pay the first month. After this initial payment and so on month by month, that calculation will be altered as the principal amount owing is chipped away. So…

• Step 3: Minus the interest you just calculated from what you just paid off, and you’ll have the amount you’ve paid from the principal.

• Step 4: Take this amount off the original principal and you’ll have the new, reduced balance on your loan.

If all this maths is doing your head in, you’ll be happy to know Mozo has a range of financial calculators that’ll help you manage the numbers. 

Steps to calculate interest-only repayments

Things are much simpler here: you just pay off the interest on the same principal each repayment period, and are left to pay the loan amount in full at the end of the loan term. Don’t be fooled by the simplicity of it, though. Since you’re not reducing the principal each month, you’re left paying the highest possible interest that the loan allows for and you’ll have to fund the final repayment at the end of it.