Help me choose a personal loan

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A guide to finding the right personal loan for you.

Once you've decided that you need a personal loan you might find yourself overwhelmed with the amount of choice you have. Low-interest loans, unsecured, car loans, low doc; sorting through these options and finding the right loan for you is an important step to getting your finance. Applying for the wrong type of loan could see you paying unnecessary interest or fees or getting a loan that doesn't suit your lifestyle. To save yourself from being stuck with the wrong type of loan for the next 1-7 years, read this guide for tips on finding the right one.

How do personal loans work?

A personal loan can be used to finance personal purchases, consolidate debt or for investment purposes. The funds can be paid to you in a lump sum or as a line of credit, with the former being repaid over a term of 1-7 years. Personal loans can be secured or unsecured, depending on your loan purpose or the assets you have to offer as security, and are usually available for loan amounts of between $1,000 and $80,000.

A quick guide to personal loan types

Loan typeTypical loan term (years)Typical loan amountInterest rateSuitable forCompare
Unsecured personal loan1-7$1,000-$50,000Fixed or variable rate, 8-16% p.a.
  • Debt consolidation
  • Used car purchase
  • Travel
  • Renovation
Secured personal loan1-7$1,000-$100,000Fixed or variable rate, 7-14% p.a.
  • Vehicle purchase
  • Debt consolidation
  • Renovation
Car loan1-7$2,000-$100,000Fixed or variable rate, 4-14% p.a.
  • New or used vehicle purchase
Low doc loan 1-7$1,000-$50,000Fixed or variable rate, 10-30% p.a.
  • Debt consolidation
  • Vehicle purchase
  • Travel
  • Renovation
Peer-to-peer 1-5$2,000-$35,000Fixed rate based on your credit score, 4-15% p.a.
  • Debt consolidation
  • Vehicle purchase
  • Travel
  • Renovation
Line of creditOngoing$5,000-$50,000Variable rate, 7-14% p.a.
  • Debt consolidation
  • Travel
  • Renovation
OverdraftOngoing$100-$50,000 Variable rate, 11-15% p.a.
  • Unexpected expenses
  • Travel
  • Renovation

Tips for comparing your options

  • Check the repayment flexibility. Most lenders offer you the choice of weekly, fortnightly or monthly repayments to work with your pay schedule, but not all do. You should also find out if you are able to make extra repayments without penalty or restrictions and whether you can pay back the loan before the end of the term.
  • Make sure you can use the funds for the purpose you need. Some loans, especially secured loans, come with restrictions on how you can use the loan amount. For example, if you get a car loan, you will only be able to spend the loan funds on a vehicle purchase and the vehicle needs to be eligible. Similarly, some lenders will not let you use a personal loan for business purposes. Make sure you can use your loan how you need to.
  • Find out how easy the loan will be to manage. You'll find that online account management is on offer from most lenders, but not all. You may also be required to pay the loan rather than using a direct debit, which is a standard for many lenders. You should also check how easy the lender is to contact and find out how you can contact them – phone, email, live chat or social media.
  • Determine if the repayments will be manageable on your budget. Use the personal loan repayment calculator to see what repayments you will need to make and then make sure that these repayments will be manageable on your budget.

Questions you need to ask to find the right loan

Before you settle on a personal loan, there are several questions that you should ask to make sure it's right for you.

The interest rate is a good benchmark with which to compare personal loans, and comparing it to other similar loans (ie secured loan vs secured loan) will help you to see how competitive it is. You also need to look at the loan's comparison rate, as it will give you an idea of the total cost of the loan, including fees and charges.

You can compare two loans against each other using this calculator:

Check for establishment or application fees, monthly or annual fees, redraw fees, direct debit fees and anything else you may be charged. Penalties for extra or early repayments may also be charged, so consider these when you're comparing.

Every loan will come with terms and conditions that you should be aware of before you sign the contract. Lenders will have the Product Disclosure Statement (PDS) and terms and conditions on their website or you should be able to request a copy to review.

This is an important question to ask to ensure your loan is affordable. You can use the personal loan repayments calculator above to see what your repayments are likely to be, as well as the calculator below to work out your borrowing power.

No matter how competitive a loan is, if it comes from a dodgy lender then it's not worth applying for. Check if the lender lists its credit licence number on its website and make sure the lender is easily contactable. You don't want to get into a situation where you are charged for late repayments if you can't get in touch with them. Reading third-party reviews can also be useful.

Lenders will usually set a minimum and maximum loan amount to show you what you're able to apply for. Make sure what you need is within these boundaries. Loan terms usually range from one to seven years but may only be available for up to five years with fixed-rate loans or peer-to-peer loans.

Picture: Shutterstock

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