How to find the right personal loan for you

 

Australians take out personal loans for various reasons. Buying a new car is the most popular choice, with finder.com.au estimating that more than 1.32 million people use personal loans for this purpose.

Debt consolidation (399,000), holidays (381,000) and funding education (381,000) also rank highly for Australians. But getting the right personal loan can be tricky, particularly with so many different products, features, rates and lenders on the market.

One of the first decisions you’ll have to make is choosing between secured and unsecured loans – what are the differences?

Secured versus unsecured loansA secured loan requires you to provide an asset to the lender as a guarantee, which the organisation can repossess and sell to cover any losses if you are unable to make repayments.

Sometimes, the asset you are purchasing through the loan will be the one you offer as security – such as a car or home – but this isn’t always the case. For example, people may choose to use personal assets, including property or land, as security for a commercial loan.

Unsecured loans don’t require you to put up an asset as collateral. On the surface, this may seem better for the borrower, but each type of loan has advantages and disadvantages.

Secured loan benefits

  • Larger loans: The risk of debt defaults tends to be lower with a secured loan, so financial institutions are more likely to approve larger sums of money.
  • Lower interest rates: Less risk also means you should have access to reduced interest rate payments compared with unsecured loans.

Unsecured loan benefits

  • Less risk for borrowers: Providing major assets as security can be daunting. Unsecured loans have higher interest payments, but the risk to you is lower.
  • Flexibility: Unsecured loans don’t usually have any restrictions regarding how you use the money, whereas some lenders may only approve secured loans for specific purposes.

Should you opt for fixed or variable loans

Secured and unsecured loans may be advertised as fixed rate or variable rate products.

A fixed rate loan means the interest is locked in for a specified period of time, meaning your payments remain the same, regardless of market activity. However, the payments on a variable rate loan are subject to change and may increase or decrease as national interest rates fluctuate.

Fixed rates have the advantage of allowing you to budget better, but they typically start higher than variable options. On the other hand, a lower variable rate can seem attractive at first, only to become more expensive due to economic shocks in the future.

Would you like help choosing the right personal loan for your circumstances? Get in touch with our team to discuss your financial needs.