A personal loan calculator is just one part of the comparison process. Before applying for a personal loan, it's wise to do your research to understand how a personal loan works. You should always make sure the personal loan you're considering matches your financial needs.
Here are five factors to consider when comparing personal loans.
Interest rate type
Can choose between a fixed rate loan (which keeps your repayments the same) and a variable rate loan (which may increase or decrease your repayments each month).
As well as the advertised rate, make sure to check the comparison rates to get a better idea of the loan’s total cost, as comparison rates combine a loan’s interest rate and standard charges into a single percentage.
A lender may charge upfront fees, such as an establishment fee or application fee, and ongoing fees, which could be charged annually or monthly. If you want to make extra repayments on your personal loan, you might also need to pay early repayment fees. Late payment fees and redraw fees may also apply.
Some personal loan lenders may let you choose between weekly, fortnightly or monthly repayments, to help you better manage your budget.
Secured or unsecured
A secured loan generally has lower interest rates than an unsecured personal loan. With a secured personal loan, you use an asset such as a car, equity in a property, or money in a term deposit as collateral to reduce the lender’s risk. However, you may lose your asset if you fail to pay back the loan.
Some personal loans offer the ability to make extra repayments, or a redraw facility that lets you access any extra repayments you have made and return this money to your bank account.
Does the length of a personal loan matter?
The length of the personal loan - aka the loan term - is one of the crucial factors that impact the overall cost of the loan.
A loan term is typically one to five years, and can be up to seven depending on the lender you choose. A shorter loan term requires you to pay off your loan balance faster, with higher repayment amounts. However you will typically pay far less interest. Whereas a longer loan term may mean smaller repayments, but those interest charges will add up over time.
You can use the repayment calculator to see how different loan terms compare in terms of regular repayment amounts and overall price.
For example, let’s say you were borrowing $10,000 and wanted to see how a shorter loan term (two years) compared to a longer loan term (five years) at a rate of 8%. RateCity’s repayment calculator shows that opting for the longer loan term means paying an extra $1,311 in interest over the life of the loan.
Short versus long term loan repayments
Total interest charged
Total cost of loan
Short-term loan (2-years)
Long-term loan (5-years)
Source: RateCity.com.au. Based on hypothetical personal loan repayments for $10,000 loans at 8% interest on 2-year term and 5-year term.
A longer loan term may suit borrowers who need some breathing room in their budget to pay off the loan. In this example, a five year loan term would save you $249 each month in repayments. However, understandably the longer you pay off a loan the more interest you are charged.
How do you pay a personal loan off sooner?
There are a few options available to borrowers to help them pay off their personal loan sooner. This includes:
- Make extra repayments (if lender allows)
- Increase your regular repayment amount
- Change your payment frequency
- Consider refinancing to a shorter loan term
While there may be some costs associated with refinancing a personal loan, switching to a shorter loan term, or one that allows you to make extra repayments without penalty, could go a long way in helping you pay off your loan faster.