Bank loans: the ins and outs

By Polly Fleeting ·
young-female-banker-explains-ins-an-outs-of-bank-loans-to-a-customer

Life is great, but the truth is, some things come with a heftier price tag than others. But that's why banks are here to help: in the form of personal loans. It may be the difference between ‘walking down the aisle’ at your dream wedding or transforming your home into an entertainers delight!

Essentially, you can get a personal bank loan for just about any big ticket item other than for a house (that’s what a mortgage is for). You borrow a certain amount, and repay what you owe to the bank (including interest and fees) over an agreed set term.

Personal loans are offered by the major banks in Australia such as ANZ, CBA, NAB and Westpac, challenger banks like St. George, BOQ, HSBC, Suncorp and Bank of Melbourne, as well as mutual banks and credit unions

Here is an example of things you can take out a bank loan for:

  • Car
  • Boat
  • Holiday
  • Home renovations
  • Wedding
  • Medical expenses
  • School fees

The who, what, why, when and how of bank loans

Secured Loan Unsecured Loan Debt Consolidation
Who for?
People looking to purchase a major item/borrow a large sum of money or people willing to put up their assets as collateral
Someone wanting to borrow money without putting assets up as collateral
For those people with lots of debt!
What is it?
A loan which requires you to put up an asset as security against the money you are borrowing
A loan which doesn’t require any security against the amount you are borrowing
A loan which allows you to combine all your debts into one
Why take one out?
To purchase a car, boat etc.
Some examples: holiday costs, medical expenses or to cover bills for a wedding or home renovations etc.
To get out of debt quicker and cheaper and to make management of your debt easier
When to take one out?
When you’re wanting to borrow a large amount of money and you have an asset to put up as security against the loan
When applying for a personal loan and you don’t have an asset to offer as security
When your debts are spiralling out of control and you can’t keep on top of all the repayments
How much in interest?
Lower interest rates than an unsecured loan as there is less risk to the bank
Higher interest rates as the bank has no security against the loan
Consolidating your debts should result in a lower rate than previously

Big Banks vs Credit Unions vs Peer to Peer

Big Banks

Most Australians are familiar with our big 4 banks - Commonwealth, Westpac, NAB and ANZ and other major players like BOQ, St. George, Bank of Melbourne and Suncorp.

Big banks such as these are profit making organisations, listed on the Australian Stock Exchange and its owners include thousands of Australian shareholders. They offer a large range of financial services and are out to make profits and lots of it!

Considering taking out a loan from a big bank? Compare major banks personal loans.

Advantages

  • Personable, with face to face service at a branch near you, they also offer 24/7 customer care
  • A major bank offers larger borrowing amounts (up to $100,000) and longer terms (1-10 years)
  • Manage your loan with ease from top of the line banking apps

Disadvantages

  • Big banks are notorious for offering higher interest rates compared to their smaller counterparts
  • They don’t miss you when it comes to fees - upfront, monthly and/or annual
  • Expect high charges for late repayments or paying off the loan before the term has ended

Credit Unions & Mutual Banks

Credit Unions and Mutual Banks are not-for-profit financial institutions, owned and operated by their members. The members are also customers of the union.

Advantages:

  • Offer attractive interest rates to its customers, as they are not motivated to make a profit to reward shareholders
  • Offer lower fees compared to the big banks as they don’t have large overhead costs
  • Customers have the right to elect board members and have a say in how the institution operates

Disadvantages:

  • You usually have to become a member of a credit union and pay a small fee
  • Lack of accessible branches and ATMs

Peer to Peer (P2P)

A new lending phenomenon to hit Australia, P2P lending allows you to borrow money directly from an investor. The mantra – ‘people investing in other people’. Compare peer to peer lenders here!

Advantages

  • Lower interest rates and fees compared to the big banks as the middleman is cut out
  • Immediate access to the money being borrowed i.e. the funds can arrive in your account the same day you file your application

Disadvantages

  • Some will not lend more than $30,000 and have a maximum loan period of 5 years
  • They are not regulated and have no government guarantee

Top 5 features of a bank loan

Scenario: Mr and Mrs Smith

young-pregnant-woman-and-husband-renovate-with-bank-loan

It was time for Mr and Mrs Smith to renovate their bathroom and kitchen, all before the arrival of their first child. They also needed to purchase some essential baby items such as a cot and stroller. After working through a budget the Smiths realised they would need to borrow $45,000 from a bank to cover these expenses. New to the world of borrowing money, Mr and Mrs Smith wanted to learn about the features they should consider when choosing a bank loan. Following some extensive research, they came up with a top 5 list:

  • No. 1. Competitive Interest Rates

Bank loans offer both fixed and variable interest rates; they’ll either fluctuate or remain the same for the term of the loan. Shop around and find a low, competitive interest rate…. But what's the difference between an ongoing interest rate and a comparison rate?

Australian laws require banks to provide two sets of rates for personal loans:

Interest rate: You have the choice between either a fixed or variable rate interest rate. Fixed means the rate will stay the same for the term of your loan. A variable interest rate will change over the duration of your loan when market interest rates change.

Comparison rate: This rate is inclusive of fees and charges, so it helps you calculate exactly what your repayments will be on the loan. You’ll quickly learn if you’re going to be stung with hefty setup or monthly fees as this rate will be a lot higher than the interest rate.

  • No. 2. Flexible repayment frequency 

Find a loan that allows your repayments to come out weekly or fortnightly rather than monthly, it will mean you’ll pay off your loan quicker, saving you money.

  • No. 3. Extra Repayments

Look for fee free extra repayments. You may find yourself in a position to make additional lump sum payments e.g. receive a work bonus or win lotto! Some lenders will charge a fee for varying the repayment program…be aware!

  • No. 4. Low Fees  

This is a no brainer! Do your research and find a bank loan with low upfront, ongoing, and or early repayment fees.

  • No. 5 Redraw facility

If you’ve paid off part of your loan in advance of the repayment schedule, you can redraw on that amount later down the track when an unexpected bill or medical issue pops up.

How much should I borrow?

Only borrow what you can afford to repay! We can’t be any more blatant than that!

Don’t stretch beyond your means as you could end up paying back more in late repayment charges than what you borrowed in the first place. You also don’t want to build up a bad credit rating.

Need a hand? Use the following Mozo calculators to help you figure out what you can afford to borrow:

Scenario: Mr and Mrs Smith

Mr and Smith crunch some figures into the Mozo personal loan repayment calculator with a 10% interest rate on $45,000, over 6 years, with repayments made monthly. This will set the Smiths back $834 each month. Once the Smiths’ bub arrives into this world they will be on a single salary, then they definitely won’t be able to afford to make these monthly repayments.

They agree to limit home renovations to just the kitchen but they still need a cot and stroller. Instead of increasing the loan term to reduce the monthly repayments, the Smiths agree to decrease their borrowing amount to $30,000. They crunch some new numbers into the calculator with a 10% interest rate on $30,000 over 6 years… monthly payments are down to $556, a lot more affordable!

Checklist when applying for a bank loan

  • Identification: Make sure you can prove who you are; most banks require two forms of ID. E.g. Birth certificate, passport, driver’s licence, utility bill with your name on it
  • Proof of income: Show the bank you have money regularly going in to repay the loan;
  • Recent pay slips are helpful
  • Statements from financial accounts: The bank wants to be right on top of all the accounts and or debts you might have such as a credit card or other personal loans. You’ll need to have copies of bank statements from the last 3 months.

Want to start comparing bank loans? Check out Mozo’s personal loans hub

Polly Fleeting
Polly Fleeting
Money writer

Polly Fleeting is a personal finance writer here at Mozo, specialising in loans and credit cards. Her work is aimed at helping people find ways to make smart product choices, reduce debt and get more for their hard-earned dollars. Polly has a degree in Journalism from the University of Technology, Sydney.