| Mar 11, 2015
Let's face it – the personal loan hasn't evolved very much in the last few decades. It's a traditional bank product that hasn’t seen a lot of innovation or huge marketing campaigns over the years. You apply for a loan, you get credit checked and if you qualify, you get funds at the same rate as everyone else. If you don’t qualify, you still end up with a ding on your credit file just for applying, thank you very much.
But times have changed.
Now you can apply for an unsecured personal loan online – or on your smartphone – and finalise an application within 15 minutes. Innovative concepts like Peer-to-Peer lending have opened up whole new marketplaces for borrowers and investors to negotiate better rates and terms directly, without the need for a bank at all. The process is often-times more straightforward, faster and more transparent.
But like any financial decision - this product has to be right for you. So here are 5 questions everyone should ask before applying for a personal loan:
1. Is a personal loan the right product for me?
Understanding your financial goal is the first step in helping you determine which product is best for you.
Many Australians use unsecured personal loans to pay off credit card debt, for example. In 2011-12, 53% of Australian households carried on average about $5,300 in credit card balances, according to the ABS. With standard credit card rates hovering around 19.75%pa towards the end of 2014 according to the RBA, financing everyday expenses or big-ticket items this way can become a very expensive proposition, so consolidating with a personal loan can be a good idea.
Alternatively, you may be planning a major life event, like moving house or getting married, both of which require some extra funds. A low-rate, no hassle unsecured personal loan that you can comfortably pay off with fixed repayments over a defined period of time, may just do the trick.
2. Where can I get the best deal?
Make sure you do your research when considering a personal loan. While you may have been with the same bank your whole financial life, it's important to look at all your options to find the right deal.
You may find that smaller financial institutions generally offer much more competitive interest rates, lower application fees and no early repayment penalties. They don’t have the large overhead costs of the major lenders, and are able to pass those savings on to their customers.
As you look at comparison rates, you’ll notice that rates creep up as you head towards the bigger brand-name banks, and different providers will have extra perks or fees which you need to uncover before signing on the dotted line.
To compare rates for unsecured personal loans, visit comparison rate sites like RateCity.com.au, Finder or Infochoice.
3. How flexible are the terms?
Establish how much you can afford in terms of regular repayments, and use this to guide the timeframe you choose to pay off the loan. Remember that with more frequent or even extra repayments over a shorter term, you reduce the total interest you end up paying over the life of your loan.
While some personal loans can go all the way to 7 years and lower your monthly repayments, you are in fact paying more interest over the entire term of the loan, compared to say, a 3-year loan.
In practice, many personal loan customers end up paying their loans out early. That's why it’s important to make sure there are no extra repayment, early exit fees or break-up penalties of any kind associated with the loan.
4. How sustainable is the loan?
Before you select your loan, consider what financial challenges may arise for you in the future.
A great way to make sure you are able to sustain your repayments is to select a fixed rate loan, which has been growing in popularity over the years.
Many people prefer this option because it gives you a set price and fixed repayments, enabling you to determine how and when you will pay off your loan.
5. Have I considered all the alternatives?
When it comes to personal loans, don’t be afraid to think outside the box (or the bank).
Peer-to-peer (P2P) lending is growing in popularity in Australia since its rapid expansion in the UK and the US. SocietyOne - Australia's leading P2P lender- brings investors and borrowers together so they can both get a better deal.
The Interest borrowers pay is determined by their credit rating, meaning the better their credit, the lower their rate. Investors, on the other hand, get access to a unique asset class with attractive rates of return.
At the time of publishing, SocietyOne offers loans of up to $30,000 at rates starting from 8.95%pa.fixed, 8.95%pa comparison for AA-rated borrowers with excellent credit.
Find out how you can start saving with a SocietyOne personal loan, today.