Savvy borrowers thinking about using current low interest rates to shop for a new loan or refinance old debts will need to do their homework to find the best personal loan deals.
By Jackie Pearson
25 February 2009
Australia’s official cash rate target may be down to 3.25% but rates on personal loans continue to range from 9.79% up to a hefty 17%. They’ve remained high because lenders are increasingly conscious of keeping control of their credit risks.
Personal loans still remain a cheaper option than many credit cards. The potential to lock in an unsecured loan at a fixed rate can also be attractive, so how do you make sure you find the best personal loan for your needs?
1. What’s your reason for borrowing?
Loans advertised specifically for the purpose of debt consolidation (rolling all your existing cards and lines of credit into one straightforward agreement and repayment schedule) usually have a higher interest rate.
Rates can be fixed or variable on consolidation loans but they are more likely to require that you provide security. They may also have an application fee and even an ongoing fee.
You can get a cheaper loan if you have a specific purpose for borrowing such as to purchase a car or to pay for home furnishings.
2. Fixed or variable rate?
Personal loans in Australia traditionally came with a fixed interest rate and repayment term. Their attraction was that you knew exactly what your repayment schedule would be for the life of the loan. Now fixed and variable rate personal loans are available from most lenders and the decision to go fixed or variable is about your personal circumstances.
Personal loan rates currently appear to be stable. Levels of personal borrowing spiked in December 2008 but there are signs that consumer demand for all types of credit eased again in January.
However, in spite of changes in demand there doesn’t appear to be fierce competition between lenders for personal loan business.
As a result, rates are remaining relatively stable. It’s not likely that any further official rate cuts would be passed on to personal borrowers so the advantages of having a variable rate are limited. A fixed rate loan may give you the peace of mind to be able to budget for the long-term.
3. Secured or unsecured?
It is possible to find an unsecured loan with a reasonably competitive interest rate, although the cheapest loans are currently secured. That means you need to provide an asset (such as a car) as security against the amount you are borrowing. The lenders decision to approve an unsecured loan will depend on the amount you are borrowing, your credit history and ability to repay.
4. What other features should you consider?
Don’t overlook fees, including the application fee and any ongoing charges. Also check penalties for missed repayments. Make sure you are able to make extra payments but also check if a penalty applies for early repayment of the loan (particularly if it has a fixed interest rate).
If you are concerned about job security it may be worth looking for a loan that allows you to defer repayments.
And if you think that Australian personal loan interest rates are high, consider borrowers in the UK where politicians are calling for the introduction of an interest rate cap on high street loans with rates as high as 28%.
To find the lowest rates online, compare personal loans at RateCity.com.au