What to know about Personal Loans
Lots of Australians find themselves short on cash during an emergency at one point in life or another. It can be very stressful trying to come up with money that you simply don’t have. However, before spending too much time and worry on the situation, it’s a good idea to look into personal loans. Do you have bad credit? No problem. There are financial institutions that offer both secured and unsecured personal loans to people with good and bad credit. Yet before leaping into a loan contract, make sure you read the fine print to ensure you understand what terms you’re agreeing to. The following information will explain the types of personal loans and other information you should know.
What is a personal loan?
A personal loan allows individual consumers to borrow money. An individual simply locates a financial institution that offers the kind of loan desired, and fills out an application. Upon approval of the application, the lender gives the borrower a lump sum of money that is due back in the form of payments that will also include loan fees and interest. There are both unsecured and secured personal loans. However, the majority of these loans are unsecured. Most commonly people take out personal loans to cover a new car or home purchase, unexpected expenses, and debt consolidation. The best thing about these loans is that there are no restrictions on how you can use the funds.
How much can you borrow?
Generally speaking personal loans usually range from $500 up to $35,000, but this will vary greatly by individual. There are many factors taken into consideration before a borrower is granted a loan. Here is a look at the factors considered:
• The amount of income you earn;
• The value of any assets owned;
• Investments you have;
• Types of expenditures you have;
• Other loan repayments;
• How many dependents you have;
• How long you’ve been employed.
Just keep in mind that different financial institutions use different figures to assess your debt serviceability. So, if one lender will not let you borrow the amount you need, you may benefit from speaking with a different lender.
Types of Personal Loans
When it comes to types of personal loans, you’ll discover that there are several options. It can be overwhelming to find yourself speaking to the lender not knowing what their words actually mean. For that reason, you can make it easier on yourself by researching the options before meeting with the representative. The following list of personal loan types will help you distinguish between the types, so you can choose the one that fits your needs.
Secured Personal Loans:
Secured personal loans are usually granted upon the purchase of a bigger item such as a house or car. The loans are “secured” because the asset acts as collateral to secure the loan. What this means is your loan is guaranteed by that house or car. In the event that you stop paying on a secured loan, the lender will repossess the item and sell it at a later time to recoup their losses. Security-backed loans generally offer the lowest interest rates because they are lower risk for the lender than unsecured loans.
Unsecured Personal Loans:
Unsecured personal loans are the most common type. These loans are perfect for those who are going through tough financial times, looking to renovate their home, or even those who want to consolidate debt. Unsecured loans are considered high risk for lenders because there are no assets securing the loan. Hence, if approved for an unsecured loan you’ll more than likely pay a higher interest rate and possibly more fees. If you are looking to get your first loan or have bad credit, you may want to consider a co-signer
because one may be required to obtain an unsecured personal loan.
Line of Credit:
A line of credit can be useful because it offers the borrower funds as needed. The credit line will usually specify a minimum and maximum that you can withdraw. This type of personal loan offers several benefits to the borrower. It offers benefits such as the maximum amount granted is higher than a traditional personal loan, you are only responsible for paying interest on the money borrowed, and you won’t need to reapply for another loan because you can simply redraw on your available balance.
Variable loans are less common. These loans can be viewed as good or bad, depending on your personal preferences. Interest rates are not fixed, so they will fluctuate with variable loans. Thus, if you are someone who lives by their budget it may not be wise to choose this loan type. Variable interest rates make it hard to follow a budget because payments will go up and down, as the interest rate fluctuates based on the discretion of the lender. On the other hand, you can benefit from this kind of loan since the interest rate is usually lower to begin with. In addition, decreases in interest rates can make the payment go down meaning repayment is less in the end. Yet still, the payment will rise if interest rates are increased.
Fixed loans are a popular choice for borrowers. In this type of loan the interest rate is fixed, which means you’ll never have to worry about an interest rate increase. Budgeting for these payments can be easy because the payment will remain the same through the duration of the loan. The only drawback of a fixed loan is that in the event of an interest rate decrease, your rate will remain the same and you’ll pay more than you needed to.
An overdraft loan is considered an emergency personal loan. These usually come with higher interest rates than normal, so you really need to be careful. Essentially an overdraft loan ensures you have enough money in your account when you need it. This can make for an easy way to access emergency funds for last minute expenditures. Though there is usually a maximum you can borrow through overdraft, you are only responsible for paying interest on the funds borrowed.
In the end, if you are in need of extra cash, a personal loan can be a great option to get you through. There are many factors you will need to address in your search for the perfect personal loan. You’ll need to decide what financial institution to do business with and what kind of loan to apply for. The best way to decide the type of personal loan that’s right for you is to assess your personal situation and determine if you have collateral, how much you need to borrow, how much you can afford to repay, and if you need a co-signer or not. Knowing the answers to those questions will help determine where to find your loan.