Sometimes situations can arise that are beyond our control and you may require an urgent capital injection. This could involve getting some emergency work done on your car or an unexpected bill pops up. Or you might want to renovate your house, purchase something important or go on a family vacation. But what happens when you don’t have the cash? That’s where a personal loan can help you out. When applying for a personal loan, it’s important that you choose a loan that is right for you. Let’s have a look at a checklist now of the top 8 things to consider for a personal loan.
1. What is a personal loan?
A personal loan is a lump sum of money that is borrowed from a lending institution. Personal loans have a predetermined time frame in which to pay the money back. This usually ranges anywhere from one to five years. Personal loans usually always have a fixed interest rate but this isn’t always the case.
Personal loans usually come in two different forms – secured and unsecured. Secured loans require the backing of collateral. This usually comes in the form of an asset such as a vehicle or property. This means that if you are unable to repay your loan for whatever reason, your lender has the right to seize your asset.
The main advantage of a secured loan is that the interest rate is generally quite low because you have an asset as collateral. This reduces the risk for the lender which is why they are able to pass on a lower interest rate to the borrower.
However, with an unsecured loan, there is no asset to use as collateral against the loan. Therefore, the lender will charge a higher interest rate in order to offset the risk of not having collateral. The loan term with an unsecured loan tends to also be shorter than that of a secured loan. In certain cases, you may not have the ability to qualify for a secured loan if you don’t have any assets to use as collateral. Therefore, you will have no choice but to apply for an unsecured loan.
All financial institutions will check your credit rating as part of the personal loan application process. If you do have a good credit standing, this may actually help you to obtain lower rates as you may be considered less of a risk to the lender. However, also be mindful of trying to apply for too many loans as this can also show up on your credit history and work against you.
If you do have a weak credit history, there are a number of financial institutions that will still consider you. Even if you have been bankrupt, some lending institutions will still actually provide you personal loans under certain terms and conditions.
3. Check the marketplace for lenders.
These days, there are many options available in which to secure personal loans aside from banks. There are a number of financial institutions offering short term and medium term personal loans. Even if you have been banking with the same bank for a number of years, that doesn’t necessarily mean that they will be offering the best rate.
It is important that you check the marketplace to see which lending institutions are offering the most competitive rates. There are a number of credit unions that can also offer you more competitive interest rates than most banks. You can now also find a number of online providers that offer personal loans that are competitive, but also very quick and convenient to apply for.
Peer to peer loans have also become a popular alternative to banks. This is an online platform in which potential borrowers and potential lenders are matched with each other. You are able to apply for both secured and unsecured loans with this platform. You can learn more by clicking here.
4. Term of the loan
Personal loans come with different loan terms. There are short term, medium term or even a long term loans such as a mortgage. With short term and medium term personal loans, you usually need to repay the money within a specific time frame. This is usually between 1 to 5 years. However, with a mortgage, this is usually payable over 20 years or more.
One of the most important considerations is the term of the loan. It is important to understand that the longer the loan term, the more interest you will pay over time. Therefore, the interest rate isn’t the only thing you need to consider. Taking the term of the loan into consideration is just as important as the interest rate.
5. Check that the credit provider is licensed.
All credit providers and lending institutions in Australia, including brokers, must be licensed by ASIC or at least be an authorised representative of an organisation that is licensed by ASIC. If you’re still not sure you can read more here.
There are a lot of scammers out there, so it’s important to make sure that you do not become seduced by somebody offering low interest rates. If you receive unsolicited contact from people offering financial products, please be very wary. Make sure you check their credentials and licenses before giving away any personal information.
6. Check the interest rate fees and charges.
Aside from the interest on your personal loan, there are also fees and charges that you need to consider. In Australia, from 1 July 2013, the fees and charges that financial institutions are permitted to charge on personal loans of more than $2,000 have been capped at a maximum amount. This means that for medium term loans, for amounts of $2001 and up to $5000, there is a one-off fee of $400. This also applies if the loan term is between 16 days and 2 years. A maximum annual interest rate of up 48% are also permitted.
If the loan amount is greater than $5000, and the term is longer than 2 years, the fees and charges cannot be higher than 48% annually. This also includes any other fixed fees or establishment fees that might be charged as above.
You also need to make sure you understand the costs involved if you were to payout your loan early. Some lending institutions actually charge a penalty if you were to pay off your loan early. So it’s important to make sure you know what these fees and charges are also. Hidden fees and charges could end up costing you a lot of money over the term of the loan.
7. Read your contract carefully.
This may seem obvious, but particularly when people are borrowing money for an emergency, and need the money quickly, they can sometimes overlook the terms and conditions of the credit contract. It is very important that you make sure the credit contract clearly states the amount you have borrowed, the interest rate (including the fees and charges), the term of the loan and how much the payments are, along with the due dates for those repayments. It is very important to make sure that all these items are included before you sign the final credit contract.
8. Paying your loan off sooner
No one likes being in debt, so the sooner you can pay your loan off the less interest you will pay. Conversely, if you do have any troubles repaying the loan, most credit providers are able to provide solutions if you communicate to them at the first sign of any trouble. Sometimes the unpredictable can happen along the way, but most lending institutions are able to assist you if something should happen during the term of your loan. However, if possible, you want to pay the loan off as soon as you can.