PERSONAL LOANS

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Five Minute Guide to Personal Loans

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By Andrew Willink
24 September 2008

What is a personal loan?

A personal loan is a loan from the bank that can be taken out for any number of reasons - paying for an upcoming holiday, buying a new car, or even to cover education fees; it is simply for ‘personal’ use.  One of the most competitive alternatives to a personal loan is the credit card which is beneficial and convenient when borrowing money for short-term purposes. However, personal loans traditionally have lower rates than credit cards, making them more appealing when loaning a more substantial amount of money; and for the long-term. 

Types of Loans

There are two main types of Personal loans – secured and unsecured. Secured loans are generally used when purchasing something physical; such as a car or furniture. The concept for this particular loan is that the item purchased with the loan is an asset, and if you are unable to repay the loan, the bank repossesses your asset. Unsecured loans however, have no asset for the bank’s security, and are used for items such as holidays or education.  Because these loans are a higher risk to the bank, the interest rate also a little higher than a secured loan. 

Therefore, when purchasing an asset such as a car, it is ideal to obtain a secured loan.  However, be certain that a personal loan is the best option for your specific situation. For example, when buying a car, consider and evaluate car loans that are available. If you are buying a new car, often these rates are relatively low, and it may be in your best interest to obtain a new car loan, rather than a secured personal loan.

Getting the best deal

When applying for a personal loan, you will notice that the terms and conditions, fees and rates will differ across the various banks.  Many will claim that certain banks have the ‘best’ personal loans, but in actuality the loans are just targeted at different profiles. Whilst a bank may offer a loan that is the best option for one person; this may not be the case for you. Be certain to look at all of the different loans, across a variety of banks. You can compare and contrast your personal loans on RateCity.

Fixed or Variable?

Now that you have evaluated your situation, and decided that the best option for you is a personal loan, the next step is to decide whether you will best benefit from a secured or unsecured loan.  Following this you should compare the personal loans on offer across a variety of banks; finding the bank that best suits your needs. The final step is choosing between a fixed or variable loan. 

What is the difference?  A fixed loan is one where your interest rate will be set at a fixed rate, for the specified amount of time.  These rates are often lower, and are most beneficial when interest rates seem to be rising.  A variable loan however, is one where the interest rate varies relative to the RBA’s dictation, and is most beneficial at times when the interest rates seem to be lowering.  A variable interest rate also does not have a fixed time frame, therefore allowing you to pay off a loan quicker and with less interest.

There is no clear-cut right or wrong answer when it comes to deciding between fixed and variable rates. Assess the current market and your own situation, and then decide which option best fits your current circumstances.

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