Should credit crazy Aussies consider personal loans?

Should credit crazy Aussies consider personal loans?

New RateCity research has lifted the lid on a nasty spending habit in Australia – credit card splurges! And while it’s hard to get by without a credit card these days, many Aussies are missing out on saving thousands because they are turning to their piece of plastic for their borrowing needs – instead of comparing low-interest personal loan options.

Twenty is the new worry age for financial debt, as young Australians sign up for their first credit cards earlier and earlier. Our data revealed that 42 percent of young people under the age of 24 have between $10,000 and $30,000 of personal debt, not including a mortgage.

So in the age of spend now, think later; how can personal loan options assist to curb the impulsive credit card borrowing trend?

Consolidating your debt

If you are finding yourself knee-high in debt, with a couple of credit cards to manage – consider consolidating your credit card debt with a personal loan.

Look for a low interest rate personal loan so you can roll over all of your debt into the one low-rate loan. This way you will be better able to manage your debt, pay it off and monitor further expenses.

Something to remember is that some credit card providers advertise balance transfers with zero percent interest for a set period of time, which may seem like an appealing option – but only for the disciplined. If you can commit to paying off your debt in the set zero balance period – this could be a valuable option but be aware, after the set period expires, the credit card revert interest rate will be much higher. So do you research and make sure you are committed to paying it off in time. 

Credit card balance transfers can also be a great way to get on top of your existing debt – if you can commit to restricting your spending and making regular repayments. Always compare both credit card and personal loan options to find which one will suit you.

Controlled repayments

If you have a tendency to overspend, splurge or succumb to impulse buys and you have trouble paying off your credit card each month, then a personal loan may be better suited to you.

Personal loans have set repayments so you will be forced to regularly pay down your debt – a great thing for impulsive spenders.

Fees and charges

Personal loans often have lower interest rates than credit cards but make sure you check the fees and charges. Fees and charges will impact the overall amount you pay off your loan so make sure you compare a range of personal loans to find one with a low interest rate, as well as fees and charges.

Borrowing term

How long do you plan on taking to pay off your loan? If you don’t have the funds upfront to pay for your big purchases on your credit card, you may be better off looking for a low interest rate personal loan so that you can pay if off over time but not incur hefty interest rate charges.

Just remember, the longer you take to pay off your loan, the more you will wind up paying in interest.

Choosing between a credit card and a personal loan will come down to your personal situation, spending habits and the size of the debt you carry. As always, run a comparison online to compare your borrowing options, so you can find a great low-rate deal and get back on top of your debt.

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Learn more about personal loans

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.

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 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.

Are there alternatives to $2000 loans?

If you need to borrow $2000 or less, alternatives to getting a personal loan or payday loan include using a credit card or the redraw facility of your home, car or personal loan.

Before you borrow $2000 on a credit card, remember that interest will continue being charged on what you owe until you clear your credit card balance. To minimise your interest, consider prioritising paying off your credit card.

Before you draw down $2000 in extra repayments from your home, car or personal loan using a redraw facility, note that fees and charges may apply, and drawing money from your loan may mean your loan will take longer to repay, costing you more in total interest.

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.

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.

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 do credit scores have to do with personal loan interest rates?

There is a strong link between credit scores and personal loan interest rates because many lenders use credit scores to help decide what interest rates to offer to potential borrowers.

If you have a higher credit score, lenders will probably classify you as a lower-risk borrower. That means they’ll be keen to win your business, so they may offer you a lower interest rate if you apply for a personal loan.

If you have a lower credit score, lenders will probably classify you as a higher-risk borrower. That means they might be concerned about you defaulting on the loan and costing them money. As a result, they might protect themselves by charging you a higher interest rate.

What are the pros and cons of bad credit personal loans?

In some instances, bad credit personal loans can help people with bad credit history to consolidate their debts, which can help make it easier for them to clear those debts. This is because the borrower might be able to consolidate several debts with higher interest rates (such as credit card loans) into one single debt with a lower interest rate and potentially fewer fees.

However, this strategy can backfire if the borrower spends the loaned funds instead of using it to repay the new loan. Another disadvantage of bad credit personal loans is that they have higher interest rates than regular personal loans.

How are personal loans regulated?

Personal lenders in Australia are regulated by ASIC (the Australian Securities & Investments Commission) and must follow responsible lending rules. That means they can’t lend money without making “reasonable inquiries” about a borrower’s financial situation and ensuring the loan is “not unsuitable” for them.

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.

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.

What is debt consolidation?

Debt consolidation is the process of rolling several old debts into one new debt, usually to save money or for the sake of convenience.