When is the right time to take out a personal loan?

When is the right time to take out a personal loan?

There’s no one ‘right’ time to take out a personal loan, because each person’s financial and life circumstances are unique.

In fact, it can often be better not to take out a personal loan if it’s not going to improve your financial and life position.

That’s because with a personal loan – or any sort of loan – you’re effectively ‘buying’ money. In other words, you’re doing the equivalent of buying $1 coins for, say, $1.10.

If you’re going to buy a $1 coin for $1.10, there ought to be a good reason.

The right time to take out a personal loan

Taking out a personal loan can sometimes make sense when you’re unexpectedly hit with a large bill.

For example, if you suddenly have to take care of medical surgery for your child or emergency repairs for your home, you’ll have to quickly access a lot of money.

Buying money in those kinds of situations can make sense, because the key consideration is speed rather than cost.

Another good time to take out a personal loan can be when you’re consolidating debt.

For example, imagine you had a credit card that was carrying $12,000 of debt at an interest rate of 20 per cent; and imagine you also had an existing personal loan of $9,000 at 13 per cent. In that situation, you could improve your financial position if you took out a $21,000 personal loan at, say, 10 per cent, and used it to pay off the debt on your credit card and original personal loan.

Now, instead of having to pay debt of $12,000 at 20 per cent and $9,000 at 13 per cent, you have to pay $21,000 at 10 per cent. So you’re still buying money, but at a reduced price.

The wrong time to take out a personal loan

Personal loans don’t make sense if the cost of buying money exceeds the benefits. This often applies when you take out a personal loan for the sake of consumption.

One example is borrowing money for a holiday. If you took out a loan of $5,000 to fund a holiday and then paid an additional $1,500 in interest and fees over the life of the loan, your $5,000 holiday would effectively become a $6,500 holiday.

That would then beg two questions. Was the holiday really worth $6,500? And was it the best way to use that extra $1,500?

If you were to answer ‘yes’ to both questions, you could argue that the personal loan was a good decision. But a ‘no’ for one or both of those questions would suggest it probably wasn’t.

Final word

Each individual is unique, so a financial decision or product that might be appropriate for one person might not be appropriate for another.

Taking out a personal loan should never be done lightly. You should seek professional advice before you take out a personal loan or any other loan product.

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Learn more about personal loans

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 are the pros and cons of debt consolidation?

In some instances, debt consolidation can help borrowers reduce their repayments or simplify them. For example, someone might take out a $7,000 personal loan at an interest rate of 8 per cent so they can repay an existing $4,000 personal loan at 10 per cent and a $3,000 credit card loan at 20 per cent.

However, debt consolidation can backfire if the borrower spends the extra money instead of using it to repay the new loan.

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.

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.

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.

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.

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.

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.

Can I get a bad credit personal loan with a guarantor?

Some lenders will consider personal loan applications from a borrower with bad credit if the borrower has a family member with good credit willing to guarantee the loan (a guarantor).

If the borrower fails to pay back their personal loan, it will be their guarantor’s responsibility to cover the repayments.

Can I get guaranteed approval for a bad credit personal loan?

Few, if any, lenders would be willing to give guaranteed approval for a bad credit personal loan. Borrowers with bad credit histories can have more complicated financial circumstances than other borrowers, so lenders will want time to study your application. 

It’s all about risk. When someone applies for a personal loan, the lender evaluates how likely that borrower would be to repay the money. Lenders are more willing to give personal loans to borrowers with good credit than bad credit because there’s a higher likelihood that the personal loan will be repaid. 

So a borrower with good credit is more likely to have a loan approved and to be approved faster, while a borrower with bad credit is less likely to have a loan approved and, if they are approved, may be approved slower.

Can unemployed single parents get personal loans?

It can be more difficult for unemployed borrowers to successfully apply for a personal loan. Most lenders require borrowers to have a regular income available to cover the cost of loan repayments.

If you’re self-employed, or if less than half of your income comes from Centrelink, you may not be eligible for some personal loan options. Consider contacting the lender before applying.

Can I get a personal loan if I receive Centrelink payments?

It is hard, but not impossible, to qualify for a personal loan if you receive Centrelink payments.

Some lenders won’t lend money to people who are on welfare. However, other lenders will simply consider Centrelink payments as another factor to weigh up when they assess a person’s capacity to repay a loan. You should check with any prospective lender about their criteria before making a personal loan application.

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.

Which lenders offer bad credit personal loans?

Several dozen lenders offer bad credit personal loans in Australia. These are generally smaller lenders that aren’t household names.