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Personal Loans

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Personal Loans

Personal loans are typically used for making moderate sized purchases such as vehicles, holidays, house renovations and the like.

If you secure vehicle finance through a car yard, they are effectively securing a personal loan for you – just be careful what they’re trying to offer you though! In many cases, you’re better off arranging your own finance as you can get better interest rates and protection through traditional financial institutions.

In general, personal loans will have a higher interest rate than mortgages but a lower interest rate than payday loans, credit cards and in-store finance. So they are a good option for consolidating your credit card and in-store finance debts as well.

Secured and Unsecured Loans - With a Secured Loan, you need to provide some collateral that the bank can use if you default on your loan payments. For example, you might put up your house as security for a car loan. In this case, if you default on your car payments, the bank can sell your house and recover their costs.

Loans can also be secured by someone else – for example parents securing a for a car for their son or daughter by guaranteeing to make the loan repayments if the child defaults.

However a loan is secured, you need to understand that if you default on your payments, you could lose your security – ie the bank will take your house or whatever asset you or someone else used to secure the loan. So take this seriously, and don’t think of it as an easy way to get a loan.

Personal loans can be:

  • Secured - With a Secured Loan, you need to provide some collateral that the bank can use if you default on your loan payments. For example, you might put up your house as security for a car loan. In this case, if you default on your car payments, the bank can sell your house and recover their costs.

    Loans can also be secured by someone else – for example parents securing a for a car for their son or daughter by guaranteeing to make the loan repayments if the child defaults.

    However a loan is secured, you need to understand that if you default on your payments, you could lose your security – ie the bank will take your house or whatever asset you or someone else used to secure the loan. So take this seriously, and don’t think of it as an easy way to get a loan.

  • Unsecured - An Unsecured Loan doesn’t require any collateral or security, but for this reason it is higher risk to the banks so they will typically charge a higher interest rate. Unsecured loans can also be difficult to get if you have a poor (or no) credit history, which is why parents so often secure loans for their children.
Alternatives to Personal Loans

Because personal loans have a higher interest rate than mortgages and are paid off over a much shorter period, an alternative method for obtaining finance is to extend the mortgage on your home.

For example, if you borrow $20,000 as a personal loan at 10% interest over 5 years, you will end up repaying $440 per month (of which $40 per month is interest) and you’ll pay $2,400 of interest alone over the life of the loan. If instead you borrow against the equity in your home and repay the $20,000 over 25 years at 7% interest, then your mortgage repayments will increase by $130 per month (quite a bit less than the $440 per month) and you will end up paying $2,200 in interest over the life of the loan. So the end result is similar, but in the short term you pay less. Other alternatives are:
  • Save the money instead! No interest repayments or fees, but might take you a little longer to get what you want.
  • Taking advantage of In-Store Finance – but fully repaying the loan during the interest free period.
So Personal Loans are an effective method of financing moderate sized purchases if you can’t extend your house mortgage to cover the cost.
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We are not certified financial planners or advisors. The information in this website is general information only. Always consult a licensed financial planner before making any finance or investment decision.


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