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Five Minute Guide to Personal Loans

Five Minute Guide to Personal Loans

Considering taking out a personal loan? Become an expert in 5 minutes with this easy personal loan guide. 

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.

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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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Learn more about personal loans

Can you refinance a $5000 personal loan?

Much like home loans, many personal loans can be refinanced. This is where you replace your current personal loan with another personal loan, often from another lender and at a lower interest rate. Switching personal loans may let you enjoy more affordable repayments, or useful features and benefits.

If you have a $5000 personal loan as well as other debts, you may be able to use a debt consolidations personal loan to combine these debts into one, potentially saving you money and simplifying your repayments.

Should I get a fixed or variable personal loan?

Fixed personal loans keep your interest rate the same for the full loan term, while interest rates on variable personal loans may be raised or lowered during your loan term.

A fixed rate personal loan keeps your repayments consistent, which can help keep your budgeting consistent. You won't have to worry about higher repayments if your rates were to rise. However, on a fixed loan you’ll also potentially miss out on more affordable repayments if variable rates were to fall.

What is a bad credit personal loan?

A bad credit personal loan is a personal loan designed for somebody with a bad credit history. This type of personal loan has higher interest rates than regular personal loans as well as higher fees.

Is a personal loan a variable or fixed-rate loan?

Depending on the personal loan lender, you may be able to choose between a fixed and a variable interest rate. But, there are a few distinct differences between the two, so it’s important to weigh up the pros and cons before deciding on what’s right for you.

A fixed interest rate loan gets you the convenience of knowing exactly how much you need to repay each fortnight or month. On the other hand, you generally won’t be able to make lump sum or advanced payments to close your personal loan early - or at least not without a penalty.

With a variable interest rate personal loan, you may be able to get a longer loan repayment term, with the option of paying off the loan early. You typically won’t need to pay any additional charges for an early full repayment either. The potential disadvantage with an interest rate that can change is that your repayment is not entirely predictable, as it can fluctuate with the market. However, you’ll likely have more options as more lenders offer a variable interest rate personal loan.

What is a personal loan?

A personal loan sits somewhere between a home loan and a credit card loan. Unlike with a credit card, you need to sign a formal contract to access a personal loan. However, the process is easier and faster than taking out a mortgage.

Loan sizes typically range from several hundred dollars to tens of thousands of dollars, while loan terms usually run from one to five years. Personal loans are generally used to consolidate debts, pay emergency bills or fund one-off expenses like holidays.

What is the average interest rate on personal loans for single parents?

Like other types of personal loans, the average interest rate for personal loans for single parents changes regularly, as lenders add, remove, and vary their loan offers. The interest rate you’ll receive may depend on a range of different factors, including your loan amount, loan term, security, income, and credit score.

How much can you borrow with a bad credit personal loan?

Borrowers who take out bad credit personal loans don’t just pay higher interest rates than on regular personal loans, they also get loaned less money. Each lender has its own policies and loan limits, but you’ll find it hard to get approved for a bad credit personal loan above $50,000.

Do student personal loans require security?

While some personal loans can be secured by the value of an asset, such as a car or equity in a property, student personal loans are often unsecured, which typically have higher interest rates.

Some lenders also offer guarantor personal loans to students. These loans have lower interest rates, as a guarantor (usually a relative of the borrower with good credit) will fully or partially guarantee the loan, taking on the financial responsibility if the borrower defaults.

What is an unsecured bad credit personal loan?

A bad credit personal loan is ‘unsecured’ when the borrower doesn’t offer up an asset, such as a car or jewellery, as collateral or security. Lenders generally charge higher interest rates on unsecured loans than secured loans.

Can I merge my personal loan with my home loan?

Yes, you can refinance your home loan and, in the process, merge or consolidate your personal loan and home loan. By doing so, you can lower the number of debts you have, and you may also reduce the total interest you have to pay.

However, you should consult a financial advisor or a mortgage broker to confirm that you are decreasing your total outstanding debt, including interest payments. The repayment term for a home loan can be much longer than that for a personal loan, and by merging the two, you could be repaying a higher amount over the full term.

Does refinancing a personal loan hurt your credit score?

Personal loan refinancing means taking out a new loan with more desirable terms in order to access a more competitive interest rate, longer loan term, better features, or even to consolidate debts.

In some situations, refinancing a personal loan can improve your credit score, while in others, it may have a negative impact. If you refinance multiple loans by consolidating these into one loan, it could improve your credit score as you’ll have only one outstanding debt liability. Your credit may also improve if you consistently pay the instalments on time.

However, applying to refinance with multiple lenders could negatively affect your credit if your applications are rejected. Also, if you delay or default the repayment, your credit score reduces.

What do single parents need for a personal loan application?

Much like applying for other personal loans, applying for personal loans for single parents will likely require the following:

  • Proof of identity
  • Proof of residence
  • Proof of income
  • Details of assets (e.g. car, home)
  • Details of liabilities (e.g. credit cards, other loans)
  • Loan amount
  • Loan term

How long does it take to get a student personal loan?

Completing an online personal loan application can often take anywhere from 10 minutes to 1 hour. Depending on your lender, processing your personal loan application may take anywhere between 1 and 24 hours. If your personal loan application is approved, you may receive the money in your bank account the following business day, or, in some cases, the same day.

Can I repay a $3000 personal loan early?

If you receive a financial windfall (e.g. tax refund, inheritance, bonus), using some of this money to make extra repayments onto your personal loan or medium amount loan could help reduce the total interest you’re charged on your loan, or help clear your debt ahead of schedule.

Check your loan’s terms and conditions before paying extra onto your loan, as some lenders charge fees for making extra repayments, or early exit fees for clearing your debt ahead of the agreed term.