Recent RBA data has revealed that the total value of personal loans Aussies have been borrowing has sunken to their lowest levels since 2015 by $4.8 billion.
The data also found that personal loans were the second type of consumer lending to slip - credit cards have also taken a dive, with 810,000 fewer accounts held since January 2018.
According to Mozo Banking Expert, Peter Marshall, the sudden cold shoulder given toward personal loans could be due to a lack of trust, on both sides of the equation.
“Since the Banking Royal Commission, lenders have become more cautious with who they lend to, which could explain the decline in personal loans,” said Marshall.
“On the other hand it could also be due to a cultural shift away from debt, as more and more Australians are working to purchase big ticket items by saving up for them.”
Some of the most common uses for a personal loan include a new car, holiday, wedding or renovation, but they can also be used to consolidate debt.
They also make for a more effective way to pay for larger expenses, when compared to a credit card says Marshall.
“Unlike a credit card, a personal loan typically comes with a lower interest rate, and some have repayment options which can help you pay the loan off faster and save on interest,” said Marshall.
“The trick to getting it right is finding the loan that best suits your needs, it’s more than just having a great rate.”
So with that in mind, we thought it was worth having a quick recap on what Aussies should be looking for when it comes to choosing the right personal loan.
Choose the right interest rate
When it comes to personal loans, there are two types of interest rates to choose from: fixed and variable. A fixed interest rate means your repayment amount won’t change over the life of the loan, since your interest rate is ‘locked in’, while a variable rate has the power to change in accordance with the market.
Secured vs unsecured
Just like interest rates, there are two types of personal loans: secured and unsecured. With a secured personal loan, you’ll need to provide some type of security to be used as collateral. This could be your car or another asset you own. While this may sound a little daunting, keep in mind there a generally lower rates with secured personal loans and you wouldn’t lose the asset unless you were unable to make repayments.
On the other hand, an unsecured personal loan means that you don’t have to offer any security, but you may be given a higher interest rate.
You may also have a few loan features attached to your personal loan, like an extra repayment or redraw facility. With an extra repayment option, you’ll be able to make additional repayments on your loan, which can help you save on interest and help you get out of debt sooner. Just keep in mind that you may be charged a fee to do this. A redraw facility then allows you to withdraw any of these extra repayments if you ever need quick cash for an unexpected expense.
Watch out for fees
Just like any financial product, there are a few fees that might come with taking out a personal loan. Application or service fees are some of the most common fees you may encounter when you start shopping around for personal loans. Other fees may include late payment or exit fees.
Think a personal loan could be the right choice for you? Head on over to our personal loan comparison tool or get started with some offers below.