In the big world of finance consumers can choose from a wide range of loans: there are student loans, car loans and personal loans to name a few.
Oftentimes there are too many to make an informed decision without having to search the Internet or pound the pavement for hours on end to get properly educated. If you are new to loans you will find a good range of information in this article to get you started on the right track.
The most important aspect to remember when it comes to any type of loan is to make sure you are familiar with your choices before signing any loan contract. You can generally choose between unsecured and secured loans and fixed interest rates and variable ones. With a secured loan you usually get better interest rates since you have to secure the loan against other assets such as a home or a car.
Right now, with the economy being somewhat weak we as consumers have the power to take advantage. There has hardly been a better time in decades to take out a loan than right now because of very low interest rates.
Student loans
Student loans are very popular in Australia because there are a lot of students needing money to pay for their education. These vary from the well known HECS scheme which is a government sponsored Higher Education Contribution Scheme. A HECS debt is interest-free meaning that you will only ever pay off your primary loan once you reach a specific income level after graduation.
Full-time students can also take advantage from a "pay as you learn" scheme. You need to speak with your bank to make sure they know this as you can avoid banking fees.
As with the common student loan, these vary as some institutions offer you better deals than others. Some offer you deferred payment arrangements where you don't pay anything back until you have graduated. Just be aware that some of those student loans might attract capitalisation of interest rates, meaning the interest is consistently added to your loan until it is time to pay.
Car Loans Comparison
Car loans are often offered by the car dealership as a by-product for your new purchase. What many Australians don't realise is that they are often better off to choose a third party insurance provider because they usually offer better deals.
It is advisable to shop around and seek independent advice outside your car dealer before you start car shopping. This will put you into a position of power and most likely safe you money.
Personal Loans Comparison
Personal loan terms are usually between seven and 10 years in length. Most lenders offer you a personal loan from $2,000 while others have no set stipulations when it comes to the amount you like to borrow.
What's interesting about personal loans is their interest rates which are often lower than those of credit cards. Therefore it is a good idea to consider a personal loan if you intend to purchase something large without intending to pay it off quick. Many personal loans are unsecured but if you have existing assets such as a home then it might be possible to use these as a personal line of credit.
Payday loans
Payday loans are popular in the U.S. and UK but for Australians they are a relatively new. Due to their exorbitant interest rates (sometimes up to 1,000 per cent) Payday loans should really only be considered in an absolute emergency.
Payday loans are not protected by the credit laws either and the lending period is short - up to 60 days.
Overdraft/Line of credit
This type of loan is handy if you are uncertain about the amount of money you'd like to borrow. Your lender and you will come to an agreement on the amount you can use to overdraw your account.
Usually more costly than a personal loan, an overdraft does have its advantages; they are flexible; they give you the option to draw money based on need only;you only pay interest if you do overdraw.
Because an overdraft is usually open-ended it allows you to repay any overdrawn monies whenever you like, and once you have done so you are free to do it all over again if the need arises.
Home loans
Most new home buyers start out with a basic home loan, either on a variable interest rate or a fixed home loan. If however you already have real estate assets then you can take advantage of a:
- Home equity loan instead. This loan will allow you to borrow against existing home equity (the money you have already paid of your first home loan) and re-invest the money given to buy an investment property or as some people do, shares.
Home equity loans do attract higher interest rates than basic home loans so please bear this in mind when you shop around.
- Revolving line of credit loan: Similar to a home equity loan, a revolving line of credit loan functions like an overdraft in which you can draw and repay money when and as you need it without needing to apply for another loan. These loans do tend to attract extra fees so be vary.
- Mortgage offset or redraw loan: These loans can be very advantageous for financial reasons because you can redraw money based on your existing home equity without needing to pay exorbitant fees or interest rates.
The one possible negative to this type of loan is a lack of interest to repay the redrawn money as this will extend the length of your loan and the amount of interest you pay in the process.
Whether you shop for personal loans, car loans or student loans it always helps to be informed. It is worth your time to shop around and compare loans from different banks. Start out by speaking to your bank first because they can often offer you a better deal than the competition because of the existing relationship you have with them. But having said this, you need several quotes from separate institutions before you should make a final decision on any type of loan.