Is it cheaper to get a fixed rate or a variable rate loan?
When it comes to paying interest on your loan you'll have two different options: fixed or variable. But given you're probably after the most affordable loan possible, which type of loan is actually cheaper? The answer is that it can be either, as it depends on the movement of the RBA's cash rate, but here's a simple explanation of the differences:
- Fixed: Love the idea of stability well this is exactly what a fixed loan will give you. Because the interest rate is fixed you'll have exactly the same interest rate over the life of the loan, and therefore certainty that you'll just need to make the same regular repayments. Opting for a fixed rate loan also means you'll be immune to any fluctuations in the cash rate, so you'll be able to have some certainty in your financial life.
- Variable: Variable rate loans can go up and down based on the RBA cash rate, which means the repayments you'll need to make are at the mercy of an external source. On the plus side though, while rates can go up they can also go down, which means you could actually end up getting a better (and cheaper) deal than a fixed rate, and these loans usually have flexible features that will mean that you can make extra repayments at any time to lower the cost and shorten the loan term.
What is a peer-to-peer lender? Are their rates lower than banks?
Peer-to-peer (P2P) lenders are becoming an increasingly prevalent, alternative option for Australians looking for low rate personal loans, but who are they? Providers such as Harmoney, Ratesetter and SocietyOne are basically online lending platforms which pair everyday investors with borrowers. Best of all, because they have lower overheads than some of the traditional players, P2P providers are generally able to offers loans with lower interest rates.
So is there a catch? Yes. While many of the minimum interest rates offered by peer-to-peer lenders are towards the lower end of the scale, the maximum rates can be very high. This is because P2P lenders will assess you on an individual basis based on a number of factors such as your credit history and employment status. If you're considered a borrower who is likely to pay back their loan (ie you have an excellent credit rating) then you may be offered a considerably lower interest rate than someone who is judged to be more risky.
Do traditional banks and lenders offer low interest rate personal loans?
They sure do. Some of the leading low interest loan options in the Mozo database are from credit unions and banks, which goes to show that it's always important to compare a range of options before taking the loan plunge.
Opting for a personal loan with a with a major bank over an online lender could mean you'll have access to benefits such as customer service at a bricks and mortar branch, and even greater choice when it comes to the loan amount you'll be able to borrow and the loan term.
Credit unions and mutual banks could also be a great option as not only do they generally have low interest rates, they are also well-known for providing a level of customer service you may not be able to get with an online provider.
Could I be missing out on any features by choosing a low interest loan over a standard personal loan?
The main drawcard of a low interest personal loan is in its name - the low interest! So if paying the lowest interest possible is number one on your priority list then a personal loan with a low rate is probably going to be the most attractive option. With this is mind, because you're paying a cheaper rate of interest, it may not offer all of the features you would expect from a standard personal loan.
Some of the features you might not have access to with a low interest personal loan include:
- Extra repayments: Some personal loans will give you the option of being able to make extra repayments at any time which means you'll be able to pay off the loan faster.
- Redraw facility: If you've made extra repayments on your loan in the past, some providers will provide you access to this money down the road if you need to redraw it again.
- Repayment frequency: Want to sync your personal loan repayments with your pay cycle? Some personal loans will give you the choice to make your repayments on a weekly, fortnightly or monthly basis.
Not concerned about any of these features? Well there's no need to worry then. Even if you are, you may still be able to find a low interest personal loan provider that offers these handy features - it may just take some shopping around to see what's out there.
Are there any fees I should look out for?
Like any loan, a low interest personal loan could come with a number of different fees. These are some of the main ones you'll want to look out for:
- Upfront fee: Also known as an application fee, this is what you'll be charged upfront when applying for your loan. While some providers will waive the fee altogether, they can can often be as high as $600.
- Late payment fee: It's as straightforward as it sounds - if you don't make your repayments on time you could be slapped with a late payment fee. These can vary in cost, but will generally be around $30.
- Break cost fee: If you've opted for a fixed rate personal loan, you may be required to pay a break cost fee if you choose to pay the loan out early. However, these aren't applicable to variable rate loans.
- Ongoing fees: One of the features you'll want to look out for when applying for a loan is any ongoing service fees. A monthly or even yearly fee could really add up over the life of the loan, which is why it's important to look at the comparison rate when comparing loans as it takes into account the interest rate and fees.
How much could I end up saving by opting for a low interest loan over a standard loan?
There are a number of different factors that will ultimately decide how much you could save by choosing a low rate loan, including whether the loan has a fixed or variable interest rate, or if the loan is secured or unsecured. But as as example, let's have a look at this scenario:
Mark decides to take out a $20,000 loan over a four year term in order to help fund some renovations to his kitchen. Mark can use his house and car as collateral against the loan, so he's decided to opt for a fixed secured personal loan which has a low interest rate of just 5.44% (currently the lowest rate in the Mozo database as of December 13, 2017). According to the Mozo Personal Loan Comparison Calculator, Mark will end up saving $966 in interest over four years by opting for the low 5.44% interest rate option compared to the current average fixed secured personal loan rate in the Mozo database of 7.62%. It just goes to show that even a slightly lower rate could potentially net you a heap of savings over the life of a loan.
How do low interest loans compare to other options like a low interest credit cards?
A low interest personal loan isn't necessarily going to be the right financing option for your own situation, with a number of other potential borrowing options, including credit cards, on offer. With a credit card, you may be able to take advantage of a range of features such as an interest free period as well as bonus point or rewards point offers - features that aren't available with personal loans. This mean a credit card could be a handy, and potentially more rewarding option for everyday spending.
However, if you know you're going to have to pay interest then a personal loan with a lower interest rate may be the better choice for you, especially with larger amounts. The average rate for all personal loans in the Mozo database is currently 9.81% (as of December 13, 2017), which compares to the average credit card interest rate of 17.22% - meaning you could be saving some serious interest by opting for a personal loan.