Types of Personal Loan

By Mozo ·
young couple searching for types of personal loans on laptop

When you don’t have the money for some of those big ticket items, a personal loan can help you achieve your financial goals. 

There are a range of lenders out there who offer different types of personal loans, which one you go with, will all depend on what it is you’re after and your financial situation. But regardless of the type of personal loan, you will incur interest, fees and charges during the loan term so be sure to read the fine print. This handy guide will give you all the ins and outs of choosing the right personal loan fr you.

Personal Loan Comparison Table - page last updated September 19, 2020

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  • 8.00% p.a.

    8.21% p.a.based on $30,000
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    Terms from 1 to 7 years. Representative example: a 5 year $30,000 loan at 8.00% would cost $36,647.51 including fees.

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    6.95% p.a.to 19.99% p.a.

    6.95% p.a.to 19.99% p.a.based on $30,000
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    Terms from 1 to 5 years. Representative example: a 5 year $30,000 loan at 6.95% would cost $35,599.71 including fees.

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  • 5.75% p.a.to 21.99% p.a.

    6.47% p.a.to 25.11% p.a.based on $30,000
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    Terms from 1 to 7 years. Representative example: a 5 year $30,000 loan at 5.75% would cost $35,190.18 including fees.

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    7.65% p.a.to 26.99% p.a.based on $30,000
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    Terms from 3 to 7 years. Representative example: a 5 year $30,000 loan at 7.65% would cost $36,196.75 including fees.

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What sort of personal loan can I take out?

Be it a necessity, like fixing your damaged car, or a desire, like giving the living room a facelift, there are many sorts of personal loans that can turn your dreams into a reality! Here’s a list of what you can take a personal loan out for:

  • Car
  • Holiday
  • Wedding
  • Renovations
  • Medical
  • Debt consolidation
  • Furniture and appliances

Personal Loan Types:

There are lots of options when it comes to choosing a personal loan. It all comes down to what suits your personal needs and financial situation. To avoid the head spins and confusion, here's a breakdown of the different types of personal loans out there. 

Secured Loan

A secured personal loan requires you to put up an asset as security in order to borrow money from the lender. As security you can offer your car, house or even jewellery as collateral. This means the lender can take possession of your asset if you fail to make the required repayments. The bank enjoys the security against defaulting, and you enjoy the lower interest rates that come with less risk for the bank. 

Pros:

  • Lower interest rates and fees because the lender has less risk
  • Secured bank loans are easier to obtain from reputable lenders

Cons:

  • If you default on the secured loan you could find yourself without a car or roof over your head…the lender will sell any particular asset to recover any money

Unsecured Loan

An unsecured personal loan does not require you to put up an asset to the lender for security. So if you don’t have an asset like a car or a house you’ll be looking at taking out an unsecured loan. You may have to convince the lender you can make the repayments on the loan by way of providing evidence of your income through pay slips. If it’s your first ever loan you are applying for, having a guarantor may help you in getting the unsecured loan. 

Pros

  • Good option if you don’t have any assets
  • Unsecured loans typically have lower interest rates than credit cards 

Cons

  • High fee penalties for late payments
  • The lender may take possible legal action if you default on the loan
  • Most providers charge higher fees and interest rates compared to a secured loan

Student loan

Let’s face it; you’re usually on a very tight budget when you’re a university student! Fortunately many lending institutions recognise the financial burden university students are under by offering assistance in the form of a student loan. This loan can help purchase a laptop, textbooks and other educational expenses, so you can avoid the stress of holding down a part time job while studying.

Pros

  • A student loan can be deferred for up to five years
  • Some banks don’t have an upfront fee on a student loan

Cons

  • Interest applies from the date you take out the loan, so it piles up pretty high

Overdraft/Line of Credit

An overdraft or line of credit personal loan is great to have in case of an unexpected emergency. It allows you to overdraw your account to an agreed amount established by the bank. You only pay interest on the money you use not on the maximum you are able to borrow.

Pros

  • Access to extra money when times are tough, 24/7
  • Interest is only charged on what you use

Cons

  • Interest rate is usually higher than other types of personal loans

Debt Consolidation

A debt consolidation loan can help you to get out of debt sooner. By combining all your debts into one personal loan you can save on interest repayments.

Pros

  • Helps you pay off all your debts faster with a competitive rate
  • One regular payment as opposed to several throughout the month

Cons

  • Chance to fall into more debt, easy to slip back into bad spending habits

Interest Rates of Personal Loans:

There are two options when it comes to paying interest on a personal loan and sorry to be the bearer of bad news but you cannot avoid it. You can choose between a fixed and variable interest rate, in the end it all comes down to personal preference. Have a read of the pros and cons of each below to help you make your decision.

Fixed personal loans

A fixed interest means that the rate is locked in over the life of your personal loan. As the interest rate will not change, it makes budgeting a whole lot easier. Plug some numbers in the Mozo budget calculator!

Pros

  • Avoid the stress of rate rises
  • Repayments remain the same throughout the term of the loan, making financial planning easier

Cons

  • Generally higher rates and fees than variable rate personal loans
  • Miss out on low interest rates if market rates fall

Variable rate personal loans

A variable rate loan can change at any time during the term. As the interest rate can fluctuate repayments on this type of loan will go up and down.

Pros

  • Lower rates and fees compared to fixed interest personal loan
  • If interest rates decrease your repayments will be less

Cons

  • Difficult to budget as repayments vary according to the changing rates
  • When interest rates rise so do your payments

How long should the loan be?

The duration you take out a personal loan for will depend on why you need the loan and your financial situation. Personal loans usually have a standard minimum term of 1 year with a maximum of seven to 10 years. Be aware, the longer the term of the loan, the more you will pay in interest.

Play with our personal loan repayments calculator to see what term would work for you.

Features to look for when choosing a personal loan;

Fair enough if you’re feeling a little overwhelmed at choosing a personal loan, there’s a lot to take in. So here’s a list of features to consider, helping make the decision a little bit easier.

  • Low fees: Avoid or keep to a minimal, upfront, ongoing, or early repayment fees.
  • Borrowing: Usually the minimum amount is $2000 the maximum will depend on what you can afford. To help figure out what you can borrow try out our personal loan repayment calculator.
  • Flexible repayments: Make sure your personal loan provides you with the flexible option of an extra repayments facility…you never know when you may find yourself with some extra cash.
  • Redraw facility: Once you've paid off a portion of your bank loan, you can draw that money back out again. This feature may be handy to have for when an unexpected bill or health issue pops up.
  • Fixed or variable interest rate: Have a read above for the pros and cons of each. 

Loan Repayments FAQ’s:

1. How are the repayments calculated?

It’s based on the full amount of your loan, related fees, the loan term and interest rates.

2. When do I make repayments?

It’s determined when you set up the loan; weekly, fortnightly, monthly or an agreed date.

3. How do I make repayments?

Direct loan repayment, direct debit, phone or online banking

4. What happens if I make my repayment late?

Charges apply (generally around $20 each time) 

Personal Loans vs Credit Cards

You have a steady income but need a little cash injection - do you pull out the plastic or call on a personal loan? There is no right or wrong, it depends on your financial situation and which one works out to be cheaper for what you need/want.

Personal Loans Credit Cards
Interest
Lower interest rate
Higher interest rate
Purchase type
Larger purchases such as a car or renovations
Smaller purchases such as clothes or entertainment
Repayments
Repayment schedule, debt repaid by end of term
Minimum repayment each monthly statement
Debt amount
Limit on what you can borrow
Open ended debt-spiral
Fees
Application fees and annual fees
No application fee but likely to have expensive annual fees

Learn more about loan vs credit

Personal Loan Fees and Charges

When it comes to personal loans, it's crucial to read the fine print! There are lots of sneaky fees you don’t want to skip over as they can affect your budget and repayments. Keep an eye out, shop around, and try to avoid the following:

  • Setup fees
  • Bank loan monthly fees
  • Early exit penalties (for those who have managed to pay off the debt before the loan term has ended)
  • Late repayment charges

Read more about personal loan fees and features here.

Personal Loan Providers: Which option is best for you?

It’s a competitive world out there when it comes to reputable lenders. But thanks to the online world, choosing a personal loan provider is a lot easier. Here's what's on the table: 

  • Big Banks: Don’t usually offer the best interest rates and have higher fees and charges. But they’re reliable, personable and efficient. The big banks also offer generous higher loan limits and more generous personal loan terms.
  • Credit Union: Non-profit financial institutions so are able to offer more competitive rates and fees to stand out from the crowd.
  • Peer to peer lender (P2P): With fewer overheads P2P loans offer standout rates, low fees and access to funds on the same day. Peer to peer lenders generally use a tier based pricing system, which means they reserve their best interest rates for creditworthy customers. 

Tips for getting your loan approved:

  • Make sure you can prove you’re ‘creditworthy’ – current financial situation, presently employed
  • Get an idea of how much you can borrow by plugging some numbers in the repayment calculator
  • Show you have a positive credit history - made previous credit repayments and bill payments on time
  • Ensure you can provide everything from the list below on ‘what you need’

What you need when applying for a personal loan:

  • Proof of identity - passport, drivers license and or Medicare card
  • Proof of income - pay slips
  • Financial details - income, assets, debts, expenses and liabilities
  • References e.g. landlord

Want to start your search for the perfect personal loan? Head to our personal loan comparison page for some killer options. 

*The Comparison Rate combines the lender's interest rate, fees and charges into a single rate to show the true cost of a personal loan. The comparison rates displayed are calculated based on a loan of $30,000 for a term of 5 years or a loan of $10,000 for a term of 3 years as indicated, based on monthly principal and interest repayments, on a secured basis for secured loans and an unsecured basis for unsecured loans. WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

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