Your personal loans guide
So you're on the hunt for a personal loan - a handy banking product designed to help you jetset overseas, purchase those new wheels or undertake that much needed home reno sooner.
But how can you find a loan that's right for you? Mozo is here to help with this handy guide that will run you through all the factors to consider when looking for a competitive personal loan deal. Starting from the top...
How much can I borrow?
Good question, follow these 3 easy steps to figure out what the right borrowing amount for you will be:
Step 1 - Create a budget: While a lender may approve you for a considerable loan amount, that doesn't mean you should automatically take out that entire sum. Use Mozo's budget calculator to get a clear picture of your financial situation and work out how much money you have to play with after all your expenses (home loan repayments/rent, utility bills, insurance etc) are taken out. Say you find you have a disposable income of $1, 000, you'd then need to think about how much of that amount you're willing to part with to go towards paying off your loan. Because if you take out a loan that makes your monthly repayments $900, you may find yourself living off cans of tuna for the life of the loan - and who wants to live like that?
Step 2 - Work out your monthly repayments: Once you've decided a monthly amount you are comfortable with, you can have a play with our personal loan repayments calculators to see what kind of borrowing scenario would work for you. If you find that the original amount you were looking at borrowing will make your ongoing repayments far too steep, you might want to consider borrowing a smaller amount or stretching the term over a longer period. For instance, if you borrowed $20, 000 with a 10% interest rate, your monthly repayments would be $930 paid back over 2 years, compared to just $432 paid back over 5 years. But keep in mind while the longer term option will take the financial pressure off each month initially, the downside is you'll pay $3, 626 more in interest over the life of the loan.
Step 3 - Search for a loan: After you've figured out how much you can afford to borrow, it's time to start the process of searching for a loan. Read on as we uncover the different types of loans, features and providers in the personal loan market.
What type of personal loans are there?
While many lenders offer a range of personal loans including car loans, travel (or holiday loans) and renovation loans, essentially all personal loans work the same way. You borrow a lump sum off the lender and pay it back over an agreed timeframe.
The benefit for you, is you kickstart your plans sooner and the benefit for the provider is they make a profit from the interest and fees you pay for their service.
So when it comes to choosing a personal loan, here are the things we consider to be the 'real' types of loans to choose between:
Secured: If you've got some assets under your ownership belt, like a car or house, you can use them as security for the loan. "Why would I put my precious goods at risk?" you ask. For the benefit of lower interest rates and fees, of course. But we should warn you, with a secured loan the provider has the right to seize your assets if you default on the loan.
Unsecured: On the other hand, if you don't have any assets to secure your loan or you don't want to put your car or home at risk, you could opt for an unsecured loan, which doesn't require you to guarantee the loan with any assets. But just keep in mind, you'll then have to say goodbye to the lower rates and fees of a secured loan.
Debt consolidation: As mentioned above, you can take out a loan to fund fun activities like overseas travel or a home reno, but there's also another useful function that a personal loan can provide - it can help you ditch debt. A debt consolidation loan works by moving across any debt you have on multiple loans or credit cards into one low rate loan. So instead of having varying due dates and a mix of interest rates (e. g 18% credit card rate, 22% store card rate and 11% car loan rate) you'll have just one repayment to worry about with a flat interest rate, which is a sure way to take the stress out of paying off your debt.
What should I look for in a personal loan?
Once you've chosen the type of personal loan that is suited to your borrowing needs, you'll need to take the time to think about the type of interest rate to go for. Here are the two main options:
Fixed interest rate: This means that your interest rate will remain the same over the life of the loan, making it easier to budget - an attractive option if you are worried about a rate hike down the track that you can't afford. Of course, there are a few cons, including generally higher rates and fees, as well as less flexible options like an extra repayments and redraw facility (see below for a full explanation). Plus, you may incur a break cost fee if you do decide to pay off the loan early.
Variable interest rate: On the other hand, a variable rate loan can change at any time, putting you at risk if your provider decides that they are going to hike up their personal loan variable rates. The real reason you would choose a variable rate loan, is for lower rates and fees and to avoid the fixed rate cons mentioned above, like penalty fees for breaking the loan early and less flexible features.
Plus don't forget to look at the comparison rate:
Comparison rate: In our personal loan table at the top of this page, the comparison rate sits to the right of the interest rate and is a quick way of comparing the cost of the personal loan once both the interest rate and fees are combined. The comparison rate is often coined as showing the 'true' cost of a loan.
And you should also take the time to jot down what options you'll need to make the loan work for you.
Extra repayments: While you may not be cashed up right now, you never know where you'll be financially just a few...
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