Personal Loans

Your personal loans guide

So you're on the hunt for a personal loan - a handy banking product designed to help you jetset overseas, purchase those new wheels, consolidate debt or undertake that much needed home reno sooner.

But how can you find the best personal loan fit for your needs? Mozo is here to help with this handy guide that will run you through all the factors to consider when looking for a competitive personal loan deal from Australia's lenders. Starting from the top...

How much can I borrow?

Good question, follow these 3 easy steps to figure out what the right borrowing amount for you will be:

Step 1 - Create a budget: While a lender may approve you for a considerable loan amount, that doesn't mean you should automatically take out that entire sum. Use Mozo's budget calculator to get a clear picture of your financial situation and work out how much money you have to play with after all your expenses (home loan repayments/rent, utility bills, insurance etc) are taken out. Say you find you have a disposable income of $1,000, you'd then need to think about how much of that amount you're willing to part with to go towards paying off your loan. Because if you take out a loan that makes your monthly repayments $900, you may find yourself living off cans of tuna for the life of the loan - and who wants to live like that?

Step 2 - Work out your monthly repayments: Once you've decided a monthly amount you are comfortable with, you can have a play with our personal loan repayments calculators to see what kind of borrowing scenario would work for you. If you find that the original amount you were looking at borrowing will make your ongoing repayments far too steep, you might want to consider borrowing a smaller amount or stretching the term over a longer period. For instance, if you borrowed $20,000 with a 10% interest rate, your monthly repayments would be $930 paid back over 2 years, compared to just $432 paid back over 5 years. But keep in mind while the longer term option will take the financial pressure off each month initially, the downside is you'll pay $3,626 more in interest over the life of the loan.

Step 3 - Compare personal loans online: Once you've figured out how much you can afford to borrow, it's time to compare personal loans to make sure you get a competitive personal loan rate with the right features for your needs. Read on for our breakdown of the different types of personal loans in the market.

What type of personal loans are there?

While many lenders offer a range of personal loans in Australia including car loans, travel (or holiday loans) and renovation loans, essentially all personal loans work the same way. You borrow a lump sum off the lender and pay it back over an agreed timeframe.

The benefit for you, is you kickstart your plans sooner and the benefit for the provider is they make a profit from the interest and fees you pay for their service.

So when it comes to personal loan comparison, here are the things we consider to be the 'real' types of loans to choose between:

Secured: If you've got some assets under your ownership belt, like a car or house, you can use them as security for the loan. "Why would I put my precious goods at risk?" you ask. For the benefit of lower interest rates and fees, of course. But we should warn you, with a secured loan the provider has the right to seize your assets if you default on the loan.

Unsecured: On the other hand, if you don't have any assets to secure your loan or you don't want to put your car or home at risk, you could opt for an unsecured loan, which doesn't require you to guarantee the loan with any assets. But just keep in mind, you'll then have to say goodbye to the lower rates and fees of a secured loan.

Debt consolidation: As mentioned above, you can take out a loan to fund fun activities like overseas travel or a home reno, but there's also another useful function that a personal loan can provide - it can help you ditch debt. A debt consolidation loan works by moving across any debt you have on multiple loans or credit cards into one low rate loan. So instead of having varying due dates and a mix of interest rates (e. g 18% credit card rate, 22% store card rate and 11% car loan rate) you'll have just one repayment to worry about with a flat interest rate, which is a sure way to take the stress out of paying off your debt.

Purchases made with a personal loan, are there restrictions?

Personal loans are there to help you fund purchases that make more sense for you financially to pay off over a period of time than wait until you have the money saved upfront. This is why personal loans are a good option for Australians who want to purchase a new car, do a small home renovation like a kitchen or outdoor entertainment area or pay for a once off expense like a wedding.  

Lenders generally don’t have many restrictions on what you can use a personal loan for though you will be asked the purpose of the loan when you apply. The key think for a lender is making sure that you can meet repayments over the loan period. But a personal loan shouldn’t be seen as way to supplement your salary to pay for everyday expenses. You’ll want something to show for the money you’ve borrowed.

For some purchases, there are lenders that will actually give you a better interest rate than a regular personal loan. For instance, if you are planning on buying a new car, you’ll find that many lenders will have sharper rates for new car purchases when you secure the car against the loan. Another loan purpose that is getting more popular with lenders in Australia is eco home improvements such as rainwater tanks, solar panels, insulation. Lenders view borrowing in these areas as smart investments and reward customers with lower interest rates. Check out the Mozo Experts Choice Personal Awards page to see which Australian lenders have received our expert’s tick of approval.

What should I look for in a personal loan?

Once you've chosen the type of personal loan that is suited to your borrowing needs, you'll need to take the time to think about the type of interest rate to go for. Here are the two main options:

Fixed interest rate: This means that your interest rate will remain the same over the life of the loan, making it easier to budget - an attractive option if you are worried about a rate hike down the track that you can't afford. Of course, there are a few cons, including generally higher rates and fees, as well as less flexible options like an extra repayments and redraw facility (see below for a full explanation). Plus, you may incur a break cost fee if you do decide to pay off the loan early.

Variable interest rate: On the other hand, a variable rate loan can change at any time, putting you at risk if your provider decides that they are going to hike up their personal loan variable rates. The real reason you would choose a variable rate loan, is for lower rates and fees and to avoid the fixed rate cons mentioned above, like penalty fees for breaking the loan early and less flexible features.

Plus don't forget to look at the comparison rate:

Comparison rate: In our personal loan table at the top of this page, the comparison rate sits to the right of the interest rate and is a quick way of comparing the cost of the personal loan once both the interest rate and fees are combined. The comparison rate is often coined as showing the 'true' cost of a loan.

And you should also take the time to jot down what options you'll need to make the loan work for you.

Extra repayments: While you may not be cashed up right now, you never know where you'll be financially just a few years down the track. And when you come into that extra money, you'll want to make sure your personal loan provides you with the flexible option of an extra repayments facility, allowing you to pump the cash straight into your loan, so you can say good riddance to your loan earlier.

Redraw facility: By the same token, you never know when you'll be hit up with unexpected bills later on in life, so another handy feature to have is a redraw facility, which allows you to dip into the extra repayments you've made on your loan. But that will ruin all your hard work of paying extra on your loan, so this should really be a last resort.

Flexible repayment frequency: If your employer pays you fortnightly, you are better off setting your loan repayments up to match. The major benefit of setting up fortnightly repayments is you'll pay more off the loan by the end of the year than the monthly option. Here's an example: If your monthly repayments are $1,000 you will pay off $12,000 over a year, whereas if your fortnightly repayments are $500 you will pay off $13,000, as there are 26 fortnights in the year. So that means you will shave an extra $1,000 for each year of the life of the loan, helping to speed up the process of paying off your loan.

Personal loans vs credit cards

If you are looking at borrowing a small amount, say under $5,000 and are tossing up between plastic or a loan, here are some things to consider:

Personal loans

Pros: Taking out a personal loan is a good option if you need a set amount of money upfront and plan to pay it off in an agreed timeframe. Plus the regular monthly repayment amount of a fixed interest rate personal loan makes it easy to budget.

Cons: If you want to pay off your fixed rate loan early you may incur a break cost fee.

Credit cards

Pros: An interest free credit card can be a good option for smaller expenses like a holiday or outdoor reno, as you have the flexibility to pay as you go.

Cons: 0% intro credit cards often revert to a much higher rate once the "honeymoon" period has come to an end. So if you can't pay off the full balance before the interest free period comes to an end, you could feel the bite of high rates and end up paying more than with a low rate personal loan.

Who has the best personal loans?

This is a tricky question to answer, as all the Australian providers of loans we looked at have their own pros and cons. So we'll let you decide which provider is best for you by running through the major pros and cons of each type of provider:

Big bank players

You probably know that there are four major banks in Australia (the Commonwealth Bank, Westpac, ANZ and NAB) but are you aware that St.George, the Bank of Melbourne, Bankwest, HSBC, ING DIRECT, Suncorp and the Bank of Queensland, also fall under the umbrella of big?

Pros: The great thing about most of these big bank providers is you get face to face contact and will be able to speak to a bank manager in branch. Plus major providers usually offer higher loan limits and more generous personal loan terms.

Cons: But you'll pay for that face to face service with generally higher rates and fees, compared to the below providers.

Want to know more about the big bank players? Head on over to our major bank personal loan hub here.

Credit unions

If you're looking for an alternative to a traditional lender, a credit union could be just up your borrowing alley. Credit unions, are not for profit organisations run entirely by members, which means...

Pros: Unlike the major providers who pass profits back to shareholders, credit unions pass on the profits to their members in the form of more competitive personal loan rates and fees.

Cons: If you want to take out a personal loan with a credit union, you will have to become a member and pay a small fee.

Peer to peer

Peer to peer lending is part of the revolutionary movement of the 'peer economy' where strangers help strangers - think car sharing, clothes swaps and crowdsourcing etc. How traditional P2P lending works is an investor will use the peer to peer platform to lend directly to a stranger. Learn more about peer to peer lending here.

Pros: The benefit for borrowers is competitive interest rates and lower fees. For instance, at the time of writing  peer to peer lenders on our site had interest rates under 10% with no ongoing fees or exit fees for paying off the loan early.

Cons: Peer to peer lenders generally use a tier based pricing system, which means they reserve their best interest rates for creditworthy customers. And P2P lenders also usually have lower limits of up to $30,000 and shorter terms of up to 3 years.

Comprehensive credit reporting and loan approval   

Australia is in the process of moving towards a comprehensive reporting system which enables lenders and other businesses to see your whole credit history when making a judgement on whether to lend you money. In the past, banks were only ever interested if you had missed a repayment or defaulted on a loan. Now they are able to get a sense of your whole financial picture such as when you make your bill repayments, whether you pay the whole bill or only part of it, how much of your credit limit you have available etc. The positive to this is that it rewards people who can demonstrate good savings and financial behaviour. Lenders can see that you will be able to pay back any money borrowed, in the timeframe that you said you would.

So now, when it comes time to thinking about getting a personal loan you really need to be much more prepared in the lead up by making sure your bills are kept up to date, you’re demonstrating good savings habits, and comfortably meeting other financial commitments.

Before you apply for a loan, it’s a good idea to get a copy of your credit report so that you can check it for any errors or know the areas that you might want to improve before you ask the bank for a loan.

There is no way of guaranteeing that you will be approved for any loan. All you can do is make sure that you’ve got the highest chance possible this means:

• Crunching the numbers upfront. There is no point shopping around car yards looking at $40,000 cars if you can only afford to borrow $20,000. You need to know how much you can realistically afford to borrow and choose a time frame that will allow you to pay the loan back comfortably without causing financial stress. The good news is that most personal loans these days allow you to make additional repayments or pay out the loan early without penalty so you can always put more towards the loan if you choose.

• Demonstrate good savings habits. Lenders want be confident that you can set goals and make payments towards these. Start by putting away money each week into a savings account, equivalent to what your repayment amount would be to demonstrate to yourself (and the bank) that you’ll be ok with the responsibility of repaying the loan.

• Keep on top of your bills. You know that a potential lender will be looking at your credit score so don’t give them an excuse to knock you back. Keep your credit file in the best health possible by making sure you stay on top of bills, rent and expenses. Even if you have not done this in the past, this isn’t a reason for you to be rejected. If lenders can see that you are making positive changes to the way you manage your finances they could be more likely to approve you now that comprehensive credit reporting is here, than in the past.

How can I get the best loan deal?

Now that you're in the know about the types of personal loans out there and the different features to look for, you're probably wondering how you can land yourself the best deal. Follow these quick steps:

Step 1 - Compare personal loans: You can kickstart your personal loan comparison with Mozo's personal loan search tool or if you're a refinancer you can use our Switch & Save Calculator to compare your current personal loan with over 100 loans in the market right now and find out which ones will save you the most in interest and fees.

Step 2 - Make your shortlist: Once you've punched in your numbers, our personal loan calculators will show you the loans best suited to your situation in one table. You can shortlist your favourites by clicking on the button on the left hand corner of the product info. And if you're struggling to decide between two loans, you can compare them side by side using our personal loan comparison calculator.

Step 3 - Start your personal loan application: When you've picked the winner, the blue 'go to site' button will take you to the provider's application website and you can apply for the loan from the comfort of your own home.

If you would like to start comparing personal loans please scroll up to the top of this page, alternatively if you want to know more about personal loans, head on over to our personal loan guides hub.

Information needed for a personal loan application

With most lenders now offering online loan applications, applying is pretty easy. In some instances you can even get the funds directly deposited into your account within a few days of loan application.

To make your personal loan application go as smoothly as possible, it’s a good idea to have some of the essential information handy and that you’ll meet any eligibility requirements.

If you are apply for a loan with a provider where you don’t already have a personal history with, its likely that you’ll need to supply them with personal information and identification details. Examples of this kind of information will be drivers licence number, passport details and utility bills in your name that show your current address.

Other information you are likely to need includes:

• Proof of income (recent payslips or tax return)
• List of other assets and liabilities
• Proof of employment
• Loan amount and loan term requested

Personal loan traps to avoid

The thing to remember about any kind of personal credit, is that you will have to pay the money back eventually. Here are some tips to help you avoid some of the biggest borrowing traps:
 
Borrowing more than you need. Like the idea of a round the world first class trip, so do we, but just because the bank says you can borrow $50,000 to do it, it doesn’t mean you should. Once that money is in your bank account it can be hard to stop the spending, so be really hard on yourself at the start of the process and only borrow the minimum amount you’ll need and try and pay for any extra with savings.

Spending the money on other things. Say you’ve budgeted $10,000 for a new deck and BBQ area, got your loan sorted out and the funds in your bank account. The quotes come in and it’s $2000 cheaper than you expected. It can be pretty tempting to then use that money saved on other purchases but rather than falling into this trap out the money straight back into the loan by making a lump sum repayment. If the loan you choose has a redraw facility if you need to use this money later on down the track you can but don’t pay interest on money you don’t need.

Being late with repayments. We all lead busy lives and it can be hard keeping track of repayment dates which is why you shouldn’t. Online banking, direct debit and payment notifications mean that you don’t have to keep track anymore. You can either choose to have the bank take it out of your account directly or alert you when your payment is due. Not only will you avoid paying a late fee this way but you’ll also keep you credit file squeaky clean.  

Not fully understanding joint loan applicant responsibilities. A joint personal loan can be a good way to fund purchases that you may not be able to get on your own, but with a combined income you can. But if you do take out a joint loan, it is important to realise that you will have responsibility of repaying the loan even if the joint applicant can’t. Be sure that you read the terms and conditions around any joint loan before signing on the dotted line.

Paying more interest than you need to. One of the best things about the Australian personal loan space is that there are many lenders to choose from. And with all this choice, means competition for your business. Don’t get stuck paying high interest rates when you don’t need to. The lower the interest rate, the lower your repayments so do yourself a favour and shop around.