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The lenders providing personal loan repayment relief during the coronavirus
More than 20 personal loan lenders are providing some much-needed breathing room for borrowers during COVID-19.
If you’re conscious that your cash flow sometimes requires a top up, whether for business or personal reasons, you might consider a loan with a redraw facility.
What is a redraw facility?
A redraw facility is the ability to borrow funds that you have already repaid. You’ll often spot this as a feature of variable rate loans. You can also be flexible about how you pay down your loan, for example using funds in a savings account to pay off some of the loan. If you have made extra repayments a redraw facility can allow you to claw back the extra amount in certain circumstances.
Why do people use a redraw facility?
There are a number of reasons why you might want to use a redraw facility:
- You might like the idea of having an emergency fund at your disposal in case you incur unexpected expenditure, such as car repairs, urgent home refurbishment or medical bills;
- If you can afford to make extra payments at least a few times every year this would make it easier to manage your funds;
- Your extra payments will reduce the amount of debt you have and this in turn will reduce the interest you’re paying.
What are the main features?
Your redraw facility brings benefits because any extra payments made offset the capital or principal you have borrowed. The amount you pay in interest will therefore be reduced so you would benefit from repaying your loan more quickly; however, your lender may set limits on how much you can overpay and redraw. If you manage your redraw facility well you can use your home loan or mortgage like a transaction or everyday account.
You may be able to pinpoint redraw facilities available for basic home loans and package home loans. Some interest only home loans also offer a redraw feature, as do some specialty home loans.
What are the pros and cons of redraw facilities?
With redraw facilities you can make extra loan repayments when it suits you and then take extra funds when you need them. This is very useful in emergency situations or in other circumstances when you incur unforeseen expenses. A redraw facility also gives you peace of mind, as you know that you can continue to reduce the loan amount while you still have access to additional cash in your account.
Bear in mind that some redraw facilities come with additional fees for withdrawing and depositing money. Lenders might charge these fees immediately or offer a specific number of free overpayments and redraws per month. In some cases redraw facilities may be limited to minimum amounts and lenders can also put limits on how frequently you use redraw facilities. This can make it difficult to redraw funds regularly.
Finally, if you choose to settle the loan in its entirety before the fixed term ends, with fixed rate home loans you may discover there are high exit fees, also known as break costs.
Always check the terms and conditions of your loan contract for specific information about redraw restrictions.
Kate was one of RateCity's Personal Finance Commentators. She has been a journalist for more than a decade, most of which has been spent writing about money. Most recently, she was the Australian Financial Review's personal finance correspondent. She is passionate about personal finance and women's independence.
The No Interest Loans Scheme (NILS) allows low income borrowers to take out no-interest loans for up to $1500 to purchase essential goods and services.
There are also similar low-interest loan schemes available to borrowers in financial hardship who are having a tough time getting finance approved.
If you’re having trouble being approved for a loan of less than $2000, and urgently need to purchase household essentials, there may be emergency loan options available to you.
For example, the No Interest Loans Scheme (NILS) allows low-income borrowers to take out interest-free loans of up to $1500 for essential goods and services.
For further assistance, consider contacting a financial counsellor, or calling the National Debt Helpline on 1300 007 007
The worse your credit history, the harder you will find it to consolidate your debts, because lenders will be less willing to lend you money and will charge you higher interest rates.
However, people with bad credit histories can make debt consolidation work by following this three-step process. First, find a lender willing to give you a bad credit personal loan – this process will be simplified if you go through a mortgage broker or use a comparison website like RateCity. Second, make sure the interest repayments on your new loan are less than the repayments on the loans being replaced. Third, instead of spending those savings, use them to repay the new 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 get that approval faster, while a borrower with bad credit is less likely to have a loan approved and to get that approval slower.
When many lenders assess a borrower’s income to determine whether they can afford a loan’s repayments without ending up in financial stress, they may not count Centrelink payments as income for this purpose.
Before applying for an emergency loan, it may be worth contacting a potential lender to find out if they accept applications from borrowers on Centrelink.
Many borrowers use quick loans to cover short-term costs, such as paying for car repairs, medical bills, or replacing broken appliances or electronics.
Before applying for a quick loan, consider whether other options are available, such as working out a payment plan or applying for an advance or extension.
The Australian personal loans market contains dozens of lenders offering several hundred different products. Personal loans are available through a range of institutions, including:
- The big four banks (ANZ, Commonwealth Bank, NAB and Westpac)
- Smaller banks (such as Bank of Queensland, Bendigo Bank and MyState)
- Mutual banks (such as Heritage Bank, Greater Bank and Newcastle Permanent)
- Credit unions (such as People’s Choice Credit Union, BCU and Community First Credit Union)
- Non-bank lenders (such as Pepper Money, Liberty and RACV)
- Peer-to-peer marketplaces (such as Harmoney, SocietyOne and RateSetter)
There are three main ways to access personal loans. You can go through a comparison website, such as RateCity. You can use a finance broker. Or you can directly contact the lender.
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, but you’ll find it hard to get approved for a bad credit personal loan above $50,000.
If more than half of your income comes from Centrelink benefits, it may be more difficult to have a $2000 loan application approved. Many lenders will check if you can afford a loan’s repayments on the income from your job before they’ll approve an application, and many won’t count Centrelink payments when assessing your income for this purpose.
Some lenders will offer $2000 loans to borrowers on Centrelink – consider contacting potential lenders to check before applying.
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.
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.