Tuesday, 23 December 2014
Posted by Mozo
Being a student is the best time of your life. Between term break trips, backpacking around Asia and roadtripping up the coast in your first car, life as a student is basically one big party (with a couple of exams thrown in).
Unfortunately, sometimes your bank account balance isn’t willing to play. The solution? A student personal loan.
If you’re over 18, have a regular income*, and are looking to borrow more than $1,000, a personal loan can provide you with the additional cash you need to fund some of the ‘big ticket’ items that form part of the student experience.
But it’s a dangerous world out there, and a cashless student looking for a good time can quickly find themselves as an even more cashless student with a lingering debt.
Luckily, we’ve got back up. His name is the Loan Ranger. And he’s taught us everything he knows about about the wild, wild west that is personal loans.
Hi-yo, Silver! Away!
*Note: some financial providers also only lend to people earning above a certain salary - normally $25,000.
Observant readers will have noticed that personal loans give you money to spend when you don’t have any. Observant and knowledgeable readers will also realise that this sounds a lot like what credit cards do. So, which should you choose?
(If you don’t know anything about credit cards, make sure you read our handy student credit card guide.)
We’re not going to tell you which one to choose, but we will give you a few pieces of advice. Here are the pros and cons of each:
- Typically lower interest rates than standard credit interest rates; around 10% less than a credit card purchase rate
- Approved quicker than a credit card, so you can start spending ASAP
- Forced to pay off debt one instalment at a time, so you can’t be tempted to let a month slide
- Not as flexible as a student credit card; you can’t drop your repayments for a month, and it’s much harder to borrow additional amounts to service your loan
- Early exit penalties on a fixed rate loan could see you charged more for paying off your loan early (more on this later)
- Flexible repayments
- Low rate credit cards, which have lower interest rates than personal loans
- Possibility to earn rewards as you spend
- Your debt could spiral out of control if you only pay the minimum repayment amount each month
- The low interest rate attached to a low rate credit card usually expires after 6-12 months
- Taking out multiple credit cards to pay off credit card debt can result in - you guessed it! - more debt
Once you’ve decided a student personal loan is the best match for you, there are two key distinctions to draw between loans: fixed rate vs variable rate, and secured vs unsecured.
Fixed personal loans
Fixed interest loans have a set rate for the life of your student loan (typically between one and seven years), which helps you accurately budget for your repayments, and will protect you against interest rate rises. But, on the other hand, if the interest rate falls, you’ll be looking like a bit of a silly duffer with your artificially high rate.
Variable rate personal loans
Variable rate loans have an interest rate that goes up and down depending on the market. While variable rates are generally lower than the fixed rates on offer, they could end up costing you more over the life of your student loan, if the Reserve Bank of Australia decides to increase the official cash rate.
Secured personal loans
These student loans are ‘secured’ by an asset. So, you might ‘secure’ a loan (and its application and ongoing fees) with your house (or, um, your parents house - we call that ‘parental backing’). This means that you will pay a lower interest rate but it also means that, in the event you are unable to repay your loan, the bank will take your house and you will end up homeless (or worse, hosting your parents in your flat because you’ve made them homeless).
Unsecured personal loans
Is the most valuable thing you own a guitar pick a drunk guy told you belonged to Michael Hutchence? No worries - you may still be able to get a personal loan as long as you fulfil the financial provider’s eligibility criteria (you’re over 18 and have a regular income, a good credit history etc.). It will have a higher interest rate than a secured loan, but it will generally still be a lot better than the rate you would get on a credit card.
There are also some other types of student loans you might want to think about:
Consolidated student loans
If you’re struggling to pay off the loans for your car, Contiki and 21st bar tab all at once, you do have options. If you have more than one personal loan (and, as a result, more than one set of interest repayments), merge them into a low interest consolidated personal loan. This will allow you to repay debt faster, and ultimately save on the total cost of your personal loan.
Deferred repayment student loans
A deferred repayment loan basically does what it says on the tin: it allows you to defer your loan repayments for a few years. This gives you enough time to finish studying and get a start in the workforce before you have to worry about paying off your loan. BUT - and this is a big ‘but’ - your interest will be compounded from day dot, meaning that, when you do start paying off your loan, you’ll have a lot more to pay back.
Fee-free student loans
We know what you’re thinking: ‘Fee-free? Where do I sign?!’ However, fee-free personal loans aren’t always the cheapest option. Student loans with fees sometimes offer very competitive interest rates, meaning that they actually cost less than their fee-free cousins. Tricky.
Mozo’s personal loan calculator will help you to find out which personal loan will cost you less in the long run.
Application and ongoing fees
Application fees can range from $0 to over $200, and ongoing fees are usually between $0 and $13 a month, but many banks now offer fee-free student loans. (Read more about those above.)
Student loan redraw facility
Redraw facilities mean that, once you’ve made extra repayments on your student personal loan, you can draw on that amount in the future.
Without meaning to wave our Doctorate of the Bleeding Obvious in your face, this is not the quickest way to pay off your student personal loan.
Early exit penalty
Some student loans lock you in for a certain amount of time, and hit you with a nasty fee if you pay off your loan before then and want out.
So, if you think your iPhone app might take off in a couple of months making you a teenage millionaire, avoid loans with early exit penalties. (And remember the wise souls who gave you this advice, O iMillionaire.)