Low-doc personal loans
If you’re self-employed or have a limited financial history, and if you’re therefore worried about your eligibility for a personal loan, you’ll be pleased to hear there are alternative options to having to produce payslips or other documents to verify your income. So if you discover you need cash in a hurry or want to plan for an important event or purchase, a low-doc personal loan may offer you a solution.
What is a low-doc personal loan?
Instead of the usual lengthy documentation often required for a personal loan application in Australia, your application for a low-doc personal loan will be assessed based on your credit history and for how long you have been operating your business. You may need a letter from an accountant to support the application. There are options for both secured and unsecured low-doc personal loans, and often you can get a low-doc loan on, for example, your car or your home. In this case, the lender might weigh up the loan-to-value ratio (LVR), which is the amount you want to borrow divided by the value of the secured item.
Why do people use low-doc personal loans?
There are several reasons why you might want to apply for a low-doc personal loan. If your business needs a cash injection to increase your working capital, then a low-doc personal loan may be used. You can also use a low-doc personal loan to fund major purchases, such as paying medical bills, taking a holiday or buying a boat.
What are the main features of low-doc personal loans?
Low-doc personal loans may be secured on property or other valuable goods, or may be unsecured, depending on the purpose of the loan and the lender’s regulations. You can apply for either a variable-rate or a fixed-rate personal loan. Some lenders will allow you to repay your loan early, however they may charge a fee for this. Applications for a low-doc personal loan are generally quick and easy, no matter where in Australia you live.
What are the pros and cons of low-doc personal loans?
Applying for a low-doc personal loan is less hassle for you because there is no need to supply vast amounts of documentation to prove your level of income. This means getting a low-doc personal loan is generally a quick process, with many lenders simply asking potential borrowers to sign a statement relating to their ability to make repayments. Most lenders will tailor the repayment schedule to your needs as a customer, offering flexibility.
The ease of getting a low-doc personal loan might tempt you to borrow more than you can afford to pay back, so it’s worth making sure you do have the means to meet the repayment schedule. You will most likely be charged higher interest rates for a low-doc loan and there may also be fees if you repay your loan early.
The consequences of low-doc personal loans
Low-doc personal loans can be useful products when taken out in the right circumstances. However, if you’re experiencing financial difficulty, a personal loan could potentially worsen your position. That’s why it’s important to think long and hard before taking out a personal loan – indeed, any form of debt.
The most obvious consequence of taking out a low-doc personal loan is that you’ll be required to pay interest. So if, for example, your loan has an interest rate of 10 per cent per annum, you’ll effectively be buying $1 for $1.10. If you’re experiencing financial difficulty, you would then have three problems to deal with:
- Fixing your original financial problem
- Repaying the principal for your new loan
- Paying the interest on your new loan
Sometimes, people use low-doc personal loans to simultaneously consolidate and refinance existing debts. For example, if you owed $5,000 on a credit card that was charging 20 per cent interest and $4,000 on a personal loan that was charging 15 per cent interest, you could improve your financial position if you rolled that $9,000 of debt into a new personal loan, charged at the aforementioned rate of 10 per cent.
The idea would be to then use those funds to pay off all the debt on your credit card and original personal loan. The result would be that instead of paying two debts at 20 per cent and 15 per cent, you would now be paying one debt at 10 per cent. That would not only be cheaper, it would also be more convenient.
However, if you are, indeed, experiencing financial difficulty, this sort of debt consolidation would do no more than ease your financial burden. In other words, it wouldn’t solve your problem; it would merely put you in a better position to take the appropriate action.
Of course, it’s also possible that you’re not experiencing any financial stress, and that you’re taking out a low-doc personal merely for the sake of convenience. For example, you might be hit with a sudden bill that you could ordinarily afford to pay, but can’t right now because your money is tied up elsewhere. So you could then take out a personal loan to pay the bill, knowing that your regular income would be more than enough to cover the repayments.
Interest rates for low-doc personal loans
The interest rate is one of the main things to consider when taking out a low-doc personal loan. However, it’s important to realise that the interest rate might not be everything it seems.
Lenders generally highlight what is known as the ‘advertised rate’. While this tells you the interest rate that you’d be charged if you took out the loan, what it doesn’t tell you is the fees you’d be charged. As a result, it doesn’t give you a complete picture of the cost of taking out the loan.
That’s why you should also look at the ‘comparison rate’, which incorporates both the advertised rate and the fees associated with the loan. As a result, the comparison rate is often regarded as the ‘real’ cost of the loan.
That said, comparison rates aren’t perfect. That’s because they’re calculated based on a loan of $30,000 over five years – so if your loan fits a different profile, the comparison rate will be slightly inaccurate. Still, comparison rates tend to give a more accurate of costs than the advertised rate.
Other things to consider with low-doc personal loans
Although the comparison rate includes fees, you should also make a point of isolating and examining all the fees. Why? So you can make an apples-for-apples comparison between all the low-doc personal loans on the market.
One quick way to do a comparison is to use an online comparison tool, like the one RateCity provides at the top of this page.
This tool also includes a repayment calculator, so you can get an idea of how much money you’d have to repay each month according to different lending scenarios. For example, imagine you find a low-doc personal loan with an interest rate of 10 per cent. Here’s how much you’d have to repay per month if you had a five-year loan term:
- Loan amount of $10,000 = $212 per month, $12,748 in total
- Loan amount of $20,000 = $425 per month, $25,496 in total
- Loan amount of $30,000 = $637 per month, $38,245 in total
Or if you had an interest rate of 10 per cent and a loan amount of $20,000, here’s how much you’d have to repay based on different loan terms:
- 3-year loan term = $645 per month, $23,232 in total
- 5-year loan term = $425 per month, $25,496 in total
- 7-year loan term = $332 per month, $27,890 in total