What to know about personal loans
Find out everything you need to know about personal loans with this handy guide.
A personal loan offers fast and easy access to the funds you need to achieve a wide range of important financial goals, from booking an overseas holiday to planning your wedding or even consolidating debt.
But choosing the right personal loan and then applying for that loan can be a confusing and complicated process, so it’s important that you understand all the ins and outs of personal loans before you start searching for financing.
Read on to find out how personal loans work and how to find and apply for the perfect loan for your needs.
Before you apply for a personal loan
Looking for a personal loan but don’t know where to start? There are a few key factors you need to consider before deciding on a loan.
Types of personal loans
There are two main types of personal loans in New Zealand: secured loans and unsecured loans. When you take out a secured personal loan, you need to provide an asset (such as a car) as a guarantee for the loan. This means that if you can’t make repayments and you default on your loan, the lender will be able to repossess that asset to regather the money it has lost.
Meanwhile, an unsecured personal loan does not require you to offer any asset as security for the loan. This means that unsecured personal loans pose a higher level of risk to lenders, so they feature higher interest rates and lower loan amounts than secured personal loans.
However, there are also other specialised types of personal loans available, including car loans, short-term loans (usually paid off in less than one year) and lines of credit.
Personal loans are offered with either a fixed or variable interest rate. The rate you choose could have a big impact on your ability to pay back the loan as well as its total cost once you have paid it off, so it’s important to be aware of the pros and cons of fixed and variable rates.
Fixed interest rates
Fixed interest rates allow you to lock in your rate for the entire loan term, providing the security of guaranteed repayment amounts and protection against rising interest rates. You may be able to secure a lower interest rate if you choose a fixed rate loan over a variable rate loan, but you generally won’t be able to make additional repayments or pay off the loan early.
Variable interest rates
The interest rate on a variable rate loan could fluctuate up and down over the life of the loan. This means you can take advantage of reduced repayments if interest rates fall, but it also means that your repayments could increase if rates rise. While variable rate loans tend to have slightly higher interest rates than fixed rate loans, they also allow you to make additional repayments and pay off your loan ahead of schedule.
Applying for a personal loan
Now that you have a rough idea of the type of personal loan you want, it’s time to narrow down your options and find a loan that meets your financial needs. To do that, you’ll need to consider a few important points:
Loan terms and repayments
Ask yourself how much you need to borrow and how long you will need to pay it off. You should also work out how much you can comfortably afford to pay off. Finder NZ’s personal loan calculator below can help you work out how much you can afford to borrow and how much your repayments will be.
The lender will set the interest rate and your repayment amounts based on your desired loan amount and loan term. You can usually choose between weekly, fortnightly and monthly repayments. If you choose a variable rate loan it’s important to check whether additional repayments are allowed.
Remember to consider how much you will end up paying over the life of the loan, as interest charges mean you will be repaying substantially more than the amount you initially borrowed.
The interest rate and regular repayment amounts are only part of the equation when determining the overall cost of a personal loan. You also need to consider any fees that apply. Common fees include:
- Establishment fee. This one-off fee is typically charged once your application has been approved and it covers the administrative costs of setting up your loan.
- Ongoing fees. Some personal loans feature ongoing monthly account-keeping fees to cover the cost of maintaining your loan.
- Early exit fees. Your lender may charge an early exit fee if you pay off your loan ahead of schedule.
How to apply
Compare the features, benefits and fees of a range of personal loans. Once you’ve found the loan you want, you can start your application. Most lenders offer a fast application and approval process online, but if you’re a new customer you will typically need to provide proof of ID before you can access any funds.
Remember that it’s important to take steps to improve your chances of a loan application being approved before you actually approach any lenders. Get a copy of your credit report and see if it contains any black marks and make sure there are no errors that could lead to your application being rejected.
The lender will assess your ability to service a personal loan based on your income, expenses, credit history and current financial situation in relation to the amount that you wish to borrow.
After you apply for a personal loan
You’ve sent off all the paperwork and your personal loan has been approved. You’ve accessed the money you needed to renovate/take a holiday/buy a new TV, so now it’s time to start paying off your debt. Just remember to keep a few key factors in mind:
When paying off your personal loan, the best thing you can do is budget. Even with a variable rate loan, you can still plan ahead to make sure you stay on top of your repayments.
It’s also a good idea to regularly review your loan to make sure it’s still meeting your needs. Refinancing could help you lock in a better interest rate, consolidate your debt and substantially reduce your repayment amount.
If you’re allowed to make additional repayments towards your personal loan, make sure you take advantage of this option whenever possible. Making extra repayments will help you reduce the amount of interest you pay over the life of your loan and could end up saving you hundreds or even thousands of dollars. However, remember that early exit fees may apply, so it’s important to be aware of the total cost of paying off your loan early before you do this.
If you’re willing to research and compare your options to find the right loan and stay disciplined when paying off your debt, the right personal loan can help you achieve your immediate financial goals.