Getting a loan gives you access to money as and when you need it, and you can get one to serve just about any purpose.
The kind of loan you should look for depends on what you want the money for, because different loans serve distinctly different purposes and they come with varied features. You might, for example, require a student loan to pay tuition fees, a car loan to buy a car, a personal loan to go on a vacation, or a home loan to buy a home.
Comparison of Loan Types
How does a loan work?
While different types of loans offer different features and take different factors into account, one aspect remains the same: you borrow money, and you repay it in instalments over a period of time along with any interest, fees, and charges that it attracts.
You can get a fixed rate loan or a variable rate loan, and they also vary in terms of secured and unsecured.
What are the types of loans available in Australia?
- Student loans Growing up, you may need a student loan before any other kind of loan, and apart from paying tuition fees, you can use the proceeds of this loan to pay for other education-related expenses. One of the most popular options with students in Australia is to get a loan through the government sponsored Higher Education Contribution Scheme (HECS). When you get a loan through HECS, you benefit from the fact that it does not attract any interest, and you start making repayments only after you get to a specific income level.Private establishments like banks also offer student loans, and in most instances, they require your parents to offer guarantee. A student loan with a parental guarantee tends to attract lower interest than one that does not come with this guarantee. While most student loans don't charge application fees or ongoing account-keeping fees, this is not always the case. If you're taking a loan that attracts interest capitalisation, where it starts calculating from the time you take the loan, know that the interest can grow to a considerable sum even before you make your first repayment. Student loans can be secured or unsecured.
- General personal loans A personal loan can secured or unsecured, and unsecured loans tend to attract a higher interest rate when compared to a secured loan. You can use the funds you receive through a personal loan for just about any legal purpose, from taking a holiday, to paying medical bills, to buying a home entertainment system, to paying for your wedding.The repayment period of personal loans tends to vary in between six months and seven years, and you normally have to make fixed repayments each month. Given their short terms, they tend to attract fixed interest rates.
- Short term cash loans If you need money in a hurry, and know you can repay it in a relatively short duration, you can think about getting a payday loan. A payday loan gives you access to funds within 24 to 48 hours of approval, and you get a response to your application almost immediately.Loan term typically varies in between 15 to 45 days, depending on when you get your next paycheque. You have to pay the entire borrowed amount plus interest and charges in one go. These loans are unsecured. These short term loans normally attract fixed interest rates.
- Car loans When you're looking for a car loan, you're essentially looking for a secured loan, because a lender would use the car in question as collateral. If you default on your car loan, expect the lender to take back as security, and this means you end up losing your car.Interest rates can be fixed or variable, and choosing between the two boils down to personal preferences. Bear in mind that the value of any car depreciates over time, and this can lead to a situation where the value of the car becomes less than what you owe on the loan. This can be the case if you end up paying more interest than you should.
- Line of credit or overdraft If you're not sure of how much money you need, or if you want access to funds over a period of time, a line of credit or an overdraft facility could be your best bet. Both these come with a maximum limit, and you can continue to draw funds until you reach this limit, as long as you continue making the required minimum repayments. You pay interest only on the amount you use.
The good and bad about personal loans
- Money when you need it. Taking a loan gives you access to money when you need it, and given the different types of loans on offer, you can expect to get a loan for just about any purpose.
- Borrowing power. Depending on your requirements, you can seek however small or large a loan. Qualifying for any loan amount depends on different factors like the purpose you need the money for, your existing financial standing, and your ability to repay. If you can provide security, you can seek considerably large loans.
- Varying loan terms. Depending on how long you wish to seek a loan for, you can look for one in accordance. For example, while a personal loan can come with a repayment period in between six months and seven years, the repayment term of a home loan can extend to 30 years.
- Can affect your creditworthiness. If you take a loan and cannot make timely repayments or if you default, it affects your creditworthiness as well as your ability to borrow in the future. In addition, taking loans and not repaying them in time, or borrowing more than can you can repay, can leave you riddled in debt.
Things to avoid about loans
- High interest rates. Some loans come with exorbitant interest rates, and in some instances, you might have to end up paying more in the form of interest than what you originally borrowed. These are situations you should avoid, and requires that you compare interest rates of loans before you apply.
- High fees and charges. Almost all loans types attract some or the other kind of fees and charges, and it is best that you find out about these at the onset. Avid taking a loan without addressing this aspect, and compare application fees, loan disbursement fees, exit fees, late payment charges, transaction charges, and all other applicable fees and charges.
Before you apply for any kind of a loan, know that you always have options in terms of lenders and comparable offerings. As a result, compare a few before moving forward with the application process.