Your Guide To Loans
There are a number of big ticket items we need to buy in life, such as a home or car, however it’s not always easy to save enough money to buy these items on our own. For many centuries the solution to this problem has been to take out a loan. The concept behind a loan is fairly basic. You need to purchase something, but you don’t have enough cash available right now. A lender will provide you with the money you need, and they will allow you to repay that money over a number of years. To make it worthwhile for the lender they need to earn a return on the money they lend to you, and this is done by charging you interest. The main benefit of a loan is that it allows you to purchase an item today, whilst paying for it over a number of years and being able to enjoy full use of the item during that time.
Types of Loans
There are different types of loans to suit different types of purchases and assets. Here we have listed some of the main loan types:
Personal loan – unsecured: This is the most common type of personal loan, and is commonly used for vehicles, holidays, debt consolidation or any other worthwhile purpose. These loans generally have a term of between one and seven years.
Personal loan – secured: Secured personal loans are most commonly used for the purchase of a vehicle. In this case the loan is secured by the car, which means the lender can take possession of the vehicle if you default on the repayments. Because of the additional security provided to the lender, secured personal loans will generally feature a lower interest rate than unsecured personal loans.
Home loan: Home loans are also known as mortgages, and as the name suggests they are used for the purchase of a home. A home loan can be used to purchase a home to live in yourself, or a home to be used as an investment property. Home loans commonly have a term of up to 30 years, and generally this is the cheapest form of borrowing in terms of the interest rate charged.
Finding the Right Loan
When looking for a loan you first need to find the loan that best suits the type of purchase you are making. If you’re buying a house then you want a home loan. If buying a new car you will want a secured loan, and if paying for a holiday you’ll need an unsecured loan.
Once you know which type of loan you need, the next step is to compare the loans available from each of the lenders to find the one which will offer you the best deal. All loans will have an interest rate, and a lower interest rate will equal lower repayments. You should aim for the loan with the lowest interest rate, but at the same time you need to ensure the establishment or ongoing fees are also reasonable.
Lenders in Australia are required by law to provide you with a comparison rate, which makes it easier to compare loans to each other. The comparison rate takes into account the standard interest rate along with any fees and charges payable.
You should look for a loan with flexible repayment options that allow you to make more frequent repayments as well as additional repayments. The loan should also allow you to repay the debt in full without charging excessive exit fees.
Tips for Repaying Your Loan
No matter what type of loan you have, there are always ways to repay the loan earlier. By repaying your loan earlier you can save hundreds or even thousands of dollars in interest.
Pay more than the minimum required: The vast majority of loans work on the concept of compound interest, which means that the sooner you can reduce your loan balance, the less interest you will pay and the sooner you will repay your loan in full. You should always try to repay more than the minimum repayment each month. Ideally you should pay as much extra as you can, but even just a few dollars extra each month will help to reduce your loan balance over the long term.
Pay fortnightly: Most loans will allow you to make repayments fortnightly, and if done properly this can help to repay your loan sooner. By paying half of your monthly repayment each fortnight, you will make a total of 26 half repayments each year, which is equal to 13 full repayments. As you are only required to make 12 monthly repayments, this strategy puts you in front by one full repayment each year.
Typical Loan Features
Interest rate: All loans will feature an interest rate, which is given as a percentage figure. This amount will be calculated daily and is generally charged to your loan on a monthly basis. A lower interest rate is generally more attractive provided that the fees and charges are reasonable.
Loan term: The loan term relates to the period of time you have to repay your loan. A personal loan will often have a maximum term of seven years, whilst home loans typically have a thirty year maximum term.
Repayment flexibility: Different loans can have different levels of flexibility when it comes to making repayments. Ideally the loan will allow you to make weekly or fortnightly repayments, as well as the ability to make additional lump sum payments. The loan should also allow you to repay the debt early without heavy penalties.
Establishment fees: Many loans will feature an establishment fee. This fee is intended to cover the lender’s costs in setting up your new loan. This fee can sometimes be negotiated down, so it is worth asking the question of your lender.
Ongoing fees: Many loans will also feature ongoing monthly fees. It is generally preferred to choose a loan with low or no ongoing fees, but you need to consider the full picture including the interest rate when comparing fees.
A loan can be a great way to fund the purchase of an asset, and by choosing the right loan you can potentially save thousands of dollars in interest over the life of the loan.