How to manage your personal loan
How can you affordably purchase the house or car of your dreams? Here is your beginners guide to taking out the right personal loan.
If you’re looking to buy a car or renovate your home but don’t have the funds, a personal loan may be right for you.
Australia’s household debt is nearing the highest worldwide, and making the right decision on your loan will make a big difference to your future.
TODAY spoke with You’re Welcome Finance founder David Lennon who gave a beginner’s guide to personal loans.
TODAY: Firstly, what is a personal loan? How does it differ from other types of loans?
LENNON: Basically a personal loan is usually a smaller loan than a mortgage and is generally used to purchase such items as cars, home renovations, debt consolidations or just about any lifestyle choice such as holidays/travel and even weddings.
TODAY: Are they a good idea?
LENNON: In my view, absolutely, yes they are. They are often the only option available together with a credit card. However, in my view a personal loan is better than a credit card in that the interest rate is usually better. Also worth noting that personal loans are paid off over a shorter period of time, whereas on a credit card you are only required to make minimum payments so the debt can remain for many years costing a lot more interest.
TODAY: What do people need to consider when applying?
LENNON: Obviously you are looking for the best personal loan solution you can find however remember it is not only the rate that is important. There are many factors to a personal loan such as fees, term, fixed or variable and other options etc. However please be very careful when applying for a personal loan. Too many enquiries on your credit file can dramatically adversely affect your credit score. This is the most common problem we come across. With too many enquiries on your credit file resulting in a low score you can be locked out of mainstream finance for a long time.
TODAY: How do people apply for one?
LENNON: You can do your own research, however this can be very time intensive. There are also some very good comparative websites such Rate City where you can easily compare rates. My advice would be to locate a good personal loan broker and get them to do all the work. They know the market and all the loans available, and will find the right loan for your individual circumstances. Most importantly, only one enquiry will be placed on your credit file so your good credit score will be retained.
TODAY: What about payday loans — are they a good idea?
LENNON: In short, no! To me they are the lender of last resort, sometimes with interest rates of up to 47% per annum! I understand people will use them when their credit score is so low they have no choice. Most mainstream lenders will not approve an application with multiple pay day lender enquiries. So again, rather than applying over and over again and ruining your score simply speak with a good broker who within five minutes can access your credit score, ascertain exactly what you need and advise which product is best suited for you.
TODAY: Will recommendations that come out of the Royal Commission affect personal loans?
LENNON: The royal commission has shone a light on the behaviour of banks and other finance institutions across Australia. They will now be required to undertake reforms and improve their behaviour. Finance brokers already account for some 60% of loans settled. My view is more clients will move towards using brokers because brokers are transparent and are required to declare everything! Nothing is hidden.
Interview and additional text by Luke Worthington.