How Do Personal Loans Work?
The personal loan is one of the easiest ways to get money to buy just about anything you want. People take them out to buy cars, to remodel their homes, even to fund dream vacations. They are a cornerstone of the financial industry with loads of people using them as their preferred form of borrowing. The issue with any kind of borrowing is understanding what you are getting into and how that money is charged interest and paid back. In more then a few cases consumers borrow money without a clear understanding of what that means and what conditions you can expect throughout the life of your loan. Compare some of the leading Australian personal loan providers.
Frequently Asked Personal Loan Questions
What is the difference between a fixed and variable interest rate?
There is a big difference between fixed and variable interest rates. A fixed rate is one that will remain the same regardless of fluctuations int he market rates while a variable interest rate will fluctuate with the market. The choice between the two comes down to your ability to roll with the potential changes in your debt and monthly payments.
The benefit to having a variable interest rate is that you can take advantage of reductions in your debt should the market rates reduce but you may also have to deal with higher payments or a higher total debt should rates rise. With a fixed rate you do not have to be concerned about any changes in your debt or monthly bill, but you will also not be able to benefit should market rates go down throughout your borrowing term. If you like to be able to plan and budget carefully or if you do not have extra money on hand to deal with potential rises in cost the fixed rate is going to be the best choice for your budget.
Can I take advantage of redraw?
Redraw is only available on variable rate loans. This is when you take out the extra payments that you made toward your personal loan. Only the extra payment amount is able to be redrawn at any given time and there is usually a minimum amount of around $500 that can be taken out. The advantage to redrawing is that you incur less risk when you put your extra money toward your debt because you can always take it back out should an emergency financial situation occur.
How does drawdown affect me?
Drawdown is the day when your funds are dispersed from the lender to you. This is usually done by a deposit into your bank account or through a bank cheque. The date is important because it marks the beginning of interest fees. As soon as your money is drawn down you will begin accruing interest fees. To make the most of your cash you should aim to use the money at that time so it is not just sitting in an account gaining interest without giving you any benefit.
Is my outstanding balance my total debt?
Not necessarily. The outstanding balance is the amount that remains on your personal loan on a particular day. It is not your total debt because it does not include accrued interest and fees that you will have to pay over the full borrowing term.
Will I be charged a fee if I pay my loan off early?
If your debt has a fixed interest rate you will likely be charged a fee for paying it off early. This fee is intended to cover the loss of profits the lender takes when you pay off your debt early. It is usually a complicated calculation that is spelled out in the terms and conditions of your agreement. Usually when you borrow on a variable rate there are no fees for early or extra repayments. The only exception to this is when you have a term that is longer then one year and you pay the balance off within twelve months. At that time you may be charged a deferred establishment fee which covers the lenders cost of establishing the loan that they expected to recoup in interest fees over a slightly longer term. The fee is usually due when your debt is cleared off or refinanced.
How much will my interest be?
The interest is calculated on the total remaining balance of your debt. Interest is calculated on a daily basis and charged each month. In order to figure out how to apply interest each day the annual interest rate is divided by 365. Your payment may not be the same each month because the interest is charged daily. Of course, each month does not have the same number of days, which affects your interest rate. Your balance also changes each month which means that the amount on which you are charged interest also changes with higher interest fees at the beginning of your term then at the end, when more of your debt is paid off.
How much will my monthly payments be?
Monthly payments are figured based on the full amount of your debt, the term, other fees, and the interest rate. The monthly amount is takes all of this into consideration and allows for a large enough payment to have the full balance cleared out at the end of your established term. With a fixed rate you should know how much your payment will always be but with a variable rate you will only have the actual amount on each statement.
How often do I make payments?
Most lenders allow the borrower to determine when the payment is due, either monthly, fortnightly, or weekly. As you look at your finances you should establish a payment date that lines up with your other bills and your salary payment. You may want to make this payment on the pay period where you do not have other big bills to pay like credit cards or the home mortgage bill. On some variable rate products you may be able to change the due date later on in the life of the loan. Your lender probably has many ways for you to submit your payment on line, over the phone, by mail, by direct debit or electronic transfer, or by visiting one of their branches.
What do I do if I cannot make a payment?
Making late payments is a dangerous practise. You will usually be charged a fee for making the payment late as well as having a higher debt amount that will accrue interest which adds to your overall cost. Additionally, your lender will probably report the late or missed payment to a credit reporting agency which will result in a negative mark on your credit file. Typically, every 30 days that your payment remains late you will be charged a new fee. If you think that you are in danger of missing a payment it is better to contact your lender and work out a payment arrangement with them. They would prefer to work something out with you then to have you default so contact them immediately and make the best of a bad situation.
Are there products available to help me make payments in the event of an emergency?
Yes, most lenders have optional products available that can make your payments for you or even pay off your balance if disaster strikes. These insurances vary from bank to bank and have different things that they cover so make sure the one you purchase does what you need it to do. Often lenders will offer a discount on your interest rate if you enroll in one of these programs. So, not only do you insulate yourself from potential financial ruin but you can save a bit of money at the same time.
What do I do if I want to pay off my balance?
In order to get the correct payoff amount you have to contact your lender. Due to the way interest and fees are charged your payoff amount that is listed on your statement or on line may not always be correct. But, if you contact the lender they can give you a payoff amount and process your payment so that the debt is completely cleared. You can contact them by phone or by going into a branch location to get the pay off amount.
Your personal loan should be just that; personal. Choose the one that has the right terms and the right interest rate for your budget and your spending habits. Every person has different needs so do not expect the product that may have worked for one of your friends to be the one that works perfectly for you.
Take the necessary time to understand exactly how your lender operates and how your loan works and you will have both the funding that you need and a repayment plan that you can live with over a long period of time. Remember that if you get into trouble financially your first call should be to that lender because there is almost nothing worse then a failure to repay your financial obligations.
Featured Personal Loans
| Personal Loan | Details | Min Interest Rate | Min Comparison Rate | Min Loan Amount | Min Loan Terms | Apply Fee | |
|---|---|---|---|---|---|---|---|
 ME Bank Personal Loan | A low rate personal loan from ME Bank with no application fee for a limited time. | 13.59% | 13.81% | $5000 | 1 year | $0 |   |
 Aussie Personal Loan | A smart way to consolidate your bills to save time and money so you can pay for your holiday, a wedding or renovate the house. | 13.90% | 14.84% | $3000 | 1 year | $199 | |
 Sugar Money Personal Loan | Fixed rate personal loan with flexible options to get you funds when you need it. | 13.99% | 15.00% | $3000 | 2 years | $250 | |
 bankmecu Personal Loan | A convenient and fast way to purchase a car or debt consolidation with affordable rates and fees. | 13.49% | 14.55% | $1000 | 1 year | $150 | |
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