So you've decided to take out a personal loan for that much needed home reno or overseas vacay - but how do you decide which loan is best suited to you? Well the first step to make that dream a reality is deciding which provider to go for.
Will a major lender with great face to face service or a smaller provider with lower overheads and better rates win your heart and your wallet?
Read on as we uncover the top must-knows about personal loans from the big banks in Australia:
What are my options for borrowing money?
As mentioned above there are plenty of candidates vying for your attention in the personal loan world. Here's a rundown of the main suiters...starting with the big banks of course.
The big banks: While Australia's major banks are made up of the big 4 - the Commonwealth Bank, Westpac, ANZ and NAB - you might be surprised to learn that there are a handful of other players that fall into the "big" category as well. These include St.George and the Bank of Melbourne (both owned by Westpac), Bankwest (owned by CommBank), HSBC and ING DIRECT (both owned by international financial players), Suncorp and the Bank of Queensland.
Credit unions: An alternative to taking out a personal loan with a major bank is borrowing from a credit union, which are non-profit financial institutions. The major benefit of a credit union is they are able to pass on better interest rates to customers, as they are not driven by paying dividends to shareholders. But keep in mind, you will need to become a member, which will usually include a small fee of around $10. But hey, you'll make up for that in no time thanks to the lower rates and fees.
Peer to peer players: A fairly new lending phenomenon downunder, peer to peer lending is all about helping one another out. The traditional idea of P2P lending is when an investor uses a peer to peer platform to lend directly to a borrower. The investor gets that good feeling of helping a stranger in need and the borrower benefits from lower interest rates and fees than from a big bank. Want to know more about peer to peer lending? Read our indepth P2P guide here.
Payday loans: If you're looking to borrow a small amount, another option available is fast cash loans from payday providers. While these small loans are usually easy to obtain, with interest rates as high as 288%p.a and fees that can reach a hefty $24 per $100 borrowed (no, we are not kidding), you are far better off borrowing from a friend or family member if you need a small amount of cash fast.
Are the big banks really better?
Well, it depends on what you define "better" as. One of the biggest drawcards of a major provider is that you'll usually get the benefit of a bricks and mortar branch, which means you can speak to a bank manager in person. But in return for that face to face service you'll usually pay a higher interest rate and fees than what smaller providers like credit unions and peer to peer lenders can offer you.
One of the other better aspects of a personal loan from a major bank is that they often have higher borrowing limits and loan terms, compared to some of the P2P lenders which will not lend over $30,000 and have a maximum loan period of 5 years. By comparison big banks will often have loan limits of up to $100,000 and loan terms of between 1 - 10 years.
What types of personal loans do major banks offer?
Secured: When you're the owner of property or a car your borrowing power will grow substantially, as major banks will offer you a better rate and lower fees if you're willing to use those assets as security for the loan. But hold on...before you decide that a secured loan is for you, remember that there's no such thing as a free lunch because if you find yourself in financial strife and can no longer repay the loan, the big bank could seize your assets (ouch!). So make sure you work out what the ongoing repayments will be to ensure you can repay the loan.
Unsecured: Whereas, an unsecured loan requires no security to take out the loan. So while you'll forfeit the more competitive interest rates of a secured loan deal, your assets won't be put in the direct firing line if you can't meet your repayment schedule. But keep in mind, the provider can still chase you for their financial loss and could even take you to court.
Debt consolidation: When your credit card, store card and personal loan debt is becoming too much to handle a debt consolidation loan can be a good option, which works by rolling all your debt into one low rate loan. Not only will you save on multiple fees but you'll also save yourself the headache of paying multiple bills.
Loan interest rates types
While a great rate should be high on your personal loan shopping list, you'll soon notice that banks will display two sets of rates for personal loans - the first being the ongoing interest rate and the second being the comparison rate.
Ongoing interest rate: When you are choosing a personal loan you will have a choice between a variable rate loan or a fixed rate loan. Both types of rates have their pros and cons. Variable rates can change at any time so they can go down or up over your loan term which means that your repayments will also change. But these loans often have more flexible features like extra repayments and redraws. With a fixed rate your repayments will be locked in for the loan duration. The benefit of this is that because your repayments won't change you can budget more easily.
Comparison rate: The comparison rate will help you see the cost of both the interest rate and fees. So while a personal loan may have a great rate, if it comes with a hefty application or ongoing fees, the loan could be more expensive than one that has a higher interest rate but no fees. The comparison rate will be a true indicator of the actual total cost of the loan.
What features should I look for in a big bank personal loan?
A low interest rate and comparison rate shouldn't be the only features you look for in a loan, here are some others you should keep your eyes peeled for when comparing loans from the major banks:
Flexible repayment frequency: A great way to pay off your loan early is by setting up your repayments fortnightly rather than monthly, as you will pay off an extra month over a year. For instance, if you choose the monthly option of repaying $500, you will pay back $6,000 over 12 months but if you opt for the fortnightly option of paying $250, then at the end of the year (26 fortnights) you will have shaved $6,500 off your personal loan. So you will have paid off $500 more with the fortnightly option, compared to monthly instalments.
Extra repayments: Another option that will help you say goodbye to your loan sooner, is a fee free extra repayments facility, which let's you make lump sum extra repayments. So when you receive that work promotion or sizeable tax return, you can use that new found wealth to pay off your loan early. Note that many fixed rate loans will not allow extra repayments or will only allow you to make them up to a set amount per year.
Redraw facility: Once you've made extra repayments, did you know some loan providers will let you redraw on that amount later on? While it's a handy feature to have if you need cash quickly to fund things like a family holiday, home renovation or pay off any lingering debt, it means your personal loan will take longer to pay off.
How much can I borrow?
While the big banks could lend you anywhere between $2,000-$100,000, the real question should be "can you afford the repayments?" So before you start your hunt for a loan, make sure you punch in your numbers into a personal loan repayments calculator to work out how much your monthly repayments will be, which will show you if you can afford to borrow that amount or will need to take out a smaller loan.
Say you want to borrow $20,000 for some new wheels paid back over 4 years, a personal loan with a 10% interest rate will set you back $507 a month. If you find that $500 coming out of your monthly budget will be far too steep for your current financial situation, you may want to consider going for a cheaper car model and borrowing a smaller amount. Alternatively you could decide to take out the loan over a longer period but keep in mind this will mean you will pay more in interest and fees over the life of the loan.
What will I need to apply for a personal loan?
There are three main areas of documentation major banks will usually require for you to apply for a loan:
Proof of income: They will want to know that you can service the loan by seeing your recent payslips from your employer or if you're self employed your last two tax returns.
Financial statements: Got a savings account, credit card or current personal loan? The big bank is probably going to ask you to provide your most recent statements for the last 3 months.
Identification: And of course they'll want to know who you are with two forms of documentation like your birth certificate and a recent utility bill.
Have the major banks made the cut? If you answered yes head to the top of the page to begin your big bank comparison. Alternatively, to compare over 100 personal loan deals in the market today, use our comparison tool here.