What is a Personal Loan?
A personal loan is a loan made by a bank, credit union or finance company to an individual or group for non commercial use. Most personal loans are taken out for purposes such as buying new cars, going on overseas holidays, getting married or completing home renovations.
There are a few different types of loans available to choose from, and it is a good idea to shop around before choosing the right one for your needs.
Types of Personal Loans
There are four main types of personal loans – secured, unsecured, variable and fixed.
1. Secured Loans
A secured loan is a great option if you are borrowing money for a large purchase, such as a new car or boat. “Secured” means that the purchase made (for example a new car) is held as security for the loan. This means that is you are unable to make the loan repayments, the car is the repossessed and sold, and the profits of the sale then used to pay off the loan. Often secured loans have lower, interest rates because there are less of a risk to the lender.
2. Unsecured Loans
An unsecured loan is a loan that is made with no assests held as security against it. Unsecured loans usually have a higher interest rate than secured personal loans, because with no assets secured against the money loaned, they are more of a risk to the lender.
3. Variable Loans
A variable rate personal loan means that the interest rate for the loan is not fixed and may fluctuate as the lender sees fit. This can be both a benefit if the interest rate decreases, however if interest rates go up you could end up paying more interest on your loan than first anticipated which makes budgeting, both for loan repayments, and for everyday life much harder.
4. Fixed Loans
A fixed rate loan is a personal loan that has a fixed interest rate for the life of the loan. The benefit to this type of loan is knowing that regardless of interest rates changes, your interest rate, and therefore your repayments will remain the same for the entire term of the loan. This gives you a sense of security, and also makes budgeting much easier. The downside to a fixed rate loan is that if interest rates drop, you will continue to pay the higher fixed rate of interest.
How to Apply for a Personal Loan
- Plan, plan, plan! When calculating how much you want to borrow, make sure you also consider how much you can afford to spend on repayments, and how long you can spend repaying the loan. Aussie Personal Loans have a great personal loan calculator tool available to help you work out how much you can afford to borrow.
- Organise your documentation. Lenders will want to see proof of identity, address and income when you apply to take out a loan. Before applying make sure you have photocopies of identification such as driver’s licenses, Medicare cards or passports, proof of address such as phone bills or rates bills, and your last few pay slips to prove your employment and income amount.
- Shop around. The internet is a great tool for researching and comparing the different loans on the market. Most banks and lenders have their loan options posted on their websites, making it easy to evaluate each product from the comfort of your own home.