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Loans Calculator Guide

What to consider when applying for a Car, Home or Personal Loan

A loans calculator is a great tool for seeing the financial impact of a new loan. But there’s some important questions to think about before you take the big financial step to apply for a loan. This guide has some information to help you in that process.

1. What type of loan are you looking for?

The decision about which type of loan to take depends on what you need the money for. Of course, if you’re looking to buy a home, then you’ll be borrowing several hundred thousand dollars, and so a home loan is the appropriate choice. But car and personal loans often appear very similar, so need to be compared closely. You can use a personal loan to purchase a car, but you may find that car loans have lower interest rates.

This is generally because a car loan is "secured" - meaning that the lender can ultimately repossess your car and sell it. By contrast, you will generally use a personal loan for purchases like a holiday which can’t be physically repossessed by a lender. This makes personal loans higher risk for a lender, and therefore often more expensive in terms of interest rate.

2. Variable or fixed?

A variable rate loan is one where the interest rate can move or be "variable" over the life of the loan. Your lender will give you notice of interest rate changes; often, these changes happen when the Reserve Bank of Australia moves the cash rate. Fixed rate loans involve the lender setting a rate for a fixed period of time, which cannot move during that period.

The main advantage of a fixed loan is, of course, the certainty of knowing what your interest rate and therefore monthly repayments will be for a period of time. If the Reserve Bank puts interest rates up, and your lender follows suit, your fixed rate won't move. However, if the Reserve Bank lowers interest rates, you won’t get the benefit. Over an extended period of time – say 5 years – the evidence is that variable rates tend to be a better option for most borrowers, but there are always windows of opportunity when you get a very low-rate fixed loan. One of the less obvious advantages of a variable rate loan is flexibility: if you come into extra money (for example, an unexpected bonus at work) then you can often make larger repayments on a variable rate loan and reduce your loan balance quickly. This generally isn’t an option with fixed rate loans, as you may have to pay a penalty for increasing repayments.

3. How much should you borrow?

Ultimately, the larger your deposit, the less you will have to borrow, and so the less interest you will have to pay. There are good reasons to build up as large a deposit as possible. For a home loan, you will typically need at least 10% of the purchase price of the home as a deposit, so you will probably borrow around 90% of the value of your home. Some lenders will let you borrow up to 95%, but remember borrowing this much leaves you very exposed if interest rates increase.

Car and personal loans are obviously much smaller than home loans, with amounts generally smaller than $30,000, and often much smaller in the case of personal loans. For example, some people might borrow to help pay for an overseas holiday, in which case you’d expect a loan of $10,000 or less.

The single most important thing about “how much should you borrow” is to be confident you can comfortably handle monthly repayments, especially if interest rates rise.

4. Repayment terms

Home loans are generally repaid over a long period of time; often 20 years or more. This doesn’t mean you will have the same home loan for that length of time – you may refinance several times over the course of 20 years even if you stay in the same home. Most home loan repayments are monthly, though sometimes there are benefits for paying fortnightly, and you should talk to your lender to see if this will help you reduce your loan term faster.

Car and personal loans tend to be much shorter, with 5 years often being the maximum.

5. Choosing the right product for you

Our loans calculator will present a number of products from lenders to you, in response to your parameters (such as amount borrowed, fixed vs variable). This list is not a "recommendation", and it's important you do your own research before you take the big step of applying for a loan. Obviously, financial suitability and affordability will be the first criteria that most of us think about, but don’t make the mistake of choosing a loan on rate alone. You should look at other features – for example, portability of a home loan, or ease of making repayments (via internet and mobile banking), or availability of other financial products such as credit cards and transaction accounts. Use the information from the loans calculator as a starting point, but not as the final arbiter!

6. Checklist

Here’s a few things to remember about using a loans calculator, and the subsequent decision to apply for a loan.

Always read the Product Disclosure Statement (PDS)

This a formal document provided by your lender which contains all of the key information about your loan. Make sure you read it thoroughly. The good news is that PDS documents are now written in "Plain English" so they’re much easier to understand.

Always play "what if" by varying key parameters

in particular, vary the interest rate compared to what you think you can get in the market currently. An important step is to see how you’d cope with increased repayments if rates went up by 2% - this might lead you to decide to wait a little longer and build up a bigger deposit.

Never just look at one loan alone.

Even if you’ve got an existing home loan, don’t assume your current lender will give you the best deal. You won’t know what’s available until you compare the alternatives from other lenders, and using a loans calculator gives you the information in a single place to start your research.

7. Applying for a car, personal or home loan

While it’s a big decision, and you should do your research carefully, there’s no reason not to start talking to lenders now. You can use RateCity's loans calculator to see a list of lenders with great home, car or personal loan products, then click through to their websites to start the ball rolling.

8. Star Ratings

CANSTAR CANNEX star ratings are a consumer-friendly benchmark that help you compare financial products based on their rates and features. We evaluate literally thousands of products from hundreds of finance institutions. Products offering superior value are awarded five stars.

Only the top 5% of products scored using the CANSTAR CANNEX star ratings methodology are awarded the prestigious five star status. As a consumer, this is your guarantee of a high-performance product.

For more information on Star Ratings, check out our Star Ratings page

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