Top Tips For Personal Loans And Traps To Avoid

May 4, 2021

Not sure where to start on your search for personal loans? Don’t worry, we’ve got you covered. In this post, we’ll check out expert tips for choosing, applying and paying off your personal loan, to then run through the various traps you should do your best to avoid. Here goes.

Choosing a Personal Loan

Okay, so let’s start at the beginning. This is what to be on the lookout for as you compare personal loans and start to narrow your options.

Tips

Opt for a personal loan that offers flexibility

As you check out personal loan options, you will notice some loans offer more flexibility than others. While for some borrowers flexibility won’t be that important, flexible features can make a big difference regarding how you repay your loan. How so?

First up, let’s look at the way in which choosing a variable rate loan can offer more flexibility than a fixed rate loan. With a fixed rate loan, your rate is obviously fixed. Which can be great, especially as rates start to rise in the market. With fixed repayments, you also know your repayments won’t increase, making it easier to budget, as you always know how much to set aside each month.

However, fixed rate loans can also be somewhat inflexible. Depending on the loan, you may not be able to make extra repayments or pay the loan off early without paying a significant penalty.

By opting for a variable rate personal loan (or a fixed rate loan that doesn’t penalise early payouts and extra repayments), you could potentially:

  • Save interest. When you make extra repayments on your loan, you can lower the amount of interest you pay.
  • Get out of debt faster. By making extra repayments, or even a large lump sum, you could pay off your loan sooner, freeing you up from debt.
  • Build a safety net. If the loan offers a redraw facility, you can make extra repayments when it suits you, safe in the knowledge that you can access those funds again should you need to.

Choosing the right option will come down to what you actually want from the loan. If you think you may want to make extra repayments or pay off your loan early, opting for a loan that offers that kind of flexibility would be a good idea. On the other hand, if all you want is a basic option with a fixed repayment schedule, that’s what you should look for.

Look beyond big banks and traditional lenders

Each of the big banks in Australia offer personal loans. These banks have names we know and recognise, names we have potentially banked with for years, names we trust to provide us with financial products without having to think too much about what’s on offer.

And, while big banks can be a great choice for some borrowers, it can be worthwhile looking beyond those traditional lenders as you search for the best personal loan.

Comparing personal loans online, you will have likely come across lenders you have never heard of before. But, just because they aren’t a brand you recognise, doesn’t mean those lenders don’t have personal loans worthy of looking at more closely.

So, what should you do if you come across a lender you’re not familiar with? One of the first things you can do is check out reviews online. For most personal loans and their providers, you should be able to find independent reviews provided by past or current borrowers. These reviews should give you an idea of how the lender operates, and how the loan stacks up.

You can also search online for further information on the lender. Try to look for info not provided by the lender itself. With that being said, the lender’s social media presence could give you an idea of how the lender interacts with its borrowers. Communication and customer service are factors to pay special attention to.

Use a personal loan calculator to work out an affordable repayment schedule

As you compare loans, use a personal loan calculator to drill down on costs. With the calculator, you can compare options side-by-side, inputting relevant details regarding interest and fees. From there, you can stretch out loan terms to see how that will affect how much each loan will cost in interest, to then create a repayment schedule you can afford.

TIP: Most lenders will ask you to provide your income and your outgoings, using that info to work out whether you will be able to afford the added stress of loan repayments should your application be approved. You can get a head-start on that process by creating a budget before you apply, making sure the loan repayment schedule you choose fits that budget.

Cut down on stress by choosing Creditworld

One way to make the task of comparing loans easier is to let Credit World do the hard yards. When you choose us, we ask you what we need to know to find the right personal loan for you. With that info, we compare what’s on offer to provide you with a range of suitable options from our panel of lenders. All that’s left for you to do is choose the one you like the look of most.

Traps

Understand your rate

Let’s get into interest. Comparing loan options, you may well be marvelling at the low rates on offer. Unfortunately though, the rate you see advertised may not be the rate you get. Why?

Rates provided by lenders marketing their loans are indicative only. Indeed, lenders may say rates on their loans ‘start at’ a certain percentage rate – but the rate you will be approved for will be determined by a range of factors, such as the loan term you choose, or the amount you decide to borrow.

Your rate will also be significantly affected by your credit score. With a higher credit score, you will be deemed lower risk – and rewarded with a lower rate. With a lower credit score, not only will it be harder for you to get approved, you may also pay a higher rate on your loan as a penalty for your higher risk status.

To find out what rate you will pay on your loan, you could apply for preapproval. Using a soft pull on your credit report, this process can allow you to more accurately calculate the interest costs on the loans you are interested in. As part of our process, Credit World can provide you with this rate before you apply.

Be aware of fees

Understanding how much you will pay in fees is just as important. Personal loan fees can come in all shapes and sizes, with some you can’t avoid – and others you can.

All personal loans charge either an establishment fee or ongoing fees. Some loans charge both. Factoring in the cost of these unavoidable fees plays an important role in comparing your options. Let’s look at why it’s a good idea to take time to calculate how much you’ll pay in fees overall.

  • Loan A charges a one-off establishment fee of $500, and no ongoing fees.
  • Loan B charges no establishment fee, and $10 per month in ongoing fees.
  • Loan C charges a $150 establishment fee, and $5 per month in ongoing fees.
  • If you opt for a one year loan: Loan A would cost you $500 in fees, Loan B would cost you $120 in fees, and Loan C would cost you $210 in fees.
  • If you opt for a two year loan: Loan A would cost you $500 in fees, Loan B would cost you $240 in fees, and Loan C would cost you $270 in fees.
  • If you opt for a three year loan: Loan A would cost you $500 in fees, Loan B would cost you $360 in fees, and Loan C would cost you $330 in fees.
  • If you opt for a four year loan: Loan A would cost you $500 in fees, Loan B would cost you $480 in fees, and Loan C would cost you $390 in fees.
  • If you opt for a five year loan: Loan A would cost you $500 in fees, Loan B would cost you $600 in fees, and Loan C would cost you $450 in fees.

And other fees? These may include late payment fees, redraw fees, and early payout fees. Whether you can avoid paying these fees depends on how responsible you are with your repayments, and what type of loan you choose.

A man relaxing at home with his dog

Fixing when rates are high

As you know, choosing a fixed rate loan allows you to lock in a rate over the entire loan term. While this can certainly be helpful when rates in the market are low and due to rise, it may not be the best idea when rates are high and due to fall.

Obviously, there is no crystal ball to help with this. There is no way to predict when rates will rise and fall, just as there is no way to predict this weekend’s lotto numbers. If you’re unsure what the market is doing, you may want to seek financial advice from a professional before you apply for a loan, especially if you’re thinking of borrowing a larger amount over a longer term.

Avoid payday loans and high-interest options

While payday loans and so-called ‘fast cash’ loans can seem appealing, they tend to be heavy on interest and fees. So, while you can often apply for these loans with minimal paperwork – and sometimes with a low income or bad credit – you will likely pay more for them in the long run.

Try to avoid these loans where possible, opting for other forms of credit. If you can’t find a personal loan that suits you, you could consider applying for a credit card or using a buy-now-pay-later platform. Bear in mind, these options still need to be used responsibly, and should not be accessed if they will cause you financial stress.

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Applying for a Personal Loan

Found the perfect loan? Now it’s time to apply.

Tips

Check your credit score

Before you apply for a personal loan, check your credit report. There are three main credit reporting agencies in Australia – Experian, Equifax and illion – and each allow you to check your credit report for free by applying online. There are also third party operators that provide credit check services, but be aware of what you’re giving away in terms of data privacy before you sign up.

Credit not looking too great? Consider holding back on your application for a while as you work on improving your credit and building your savings. Why? If you apply for a personal loan with bad credit, you risk having your application rejected – or potentially paying a much higher interest rate if you’re approved.

Check the eligibility requirements

Most lenders outline eligibility requirements on their loans. To apply for a personal loan in Australia, you will typically have to meet the following requirements.

  • You must be at least 18 years old.
  • You must be an Australian citizen or permanent resident. Some lenders may also offer loans to New Zealand citizens, or to visitors with an eligible visa.
  • You must live in Australia.
  • You must meet minimum income requirements.
  • You must be employed or receive regular income.
  • You must have a good credit rating. Some lenders allow some leeway in their credit expectations, depending on the type of loan on offer.
  • You must not be going through the process of bankruptcy.

If you are unsure of the eligibility requirements, such as the minimum income required, you can ask the lender for more details before you apply.

TIP: Don’t apply for a loan unless you meet each of the requirements set out by the lender. If you aren’t eligible for whatever reason, your application will likely be rejected. This rejection will be recorded on your credit report, bringing down your credit score, and making it harder to get approved in the future.
A woman smiling as she types into her laptop

Read through each question carefully

Most personal loan applications can be completed online in 10-15 minutes. With that being said though, this is not something you should hurry through. Give yourself time to read through each question, and be sure to answer carefully. Check each answer before you hit apply to avoid giving an incorrect answer that could jeopardise your chances of approval.

Prepare required documentation in advance

When you apply, you will need to hand over a wide range of documentation to back up the information provided in your application. Depending on the lender, this could include:

  • Documents to verify your identity, such as your birth certificate, driver’s licence or passport.
  • Proof of your address, which will typically include your driver’s licence and a utility bill, mobile phone bill or bank statement.
  • Documents to verify your income and employment, which will usually include your last two payslips or your most recent bank statement covering the past three months.
  • If you’re self-employed, you will typically have to provide your most recent Notice of Assessment, tax returns for the previous one or two years, and your most recent bank statement.
  • Proof of other forms of income such as rental income, pensions, retirement income and spousal or maintenance support would typically include bank statements, Notices of Assessment, and formal documents outlining your position.

By looking out all the documents you’ll likely need before you apply, you can streamline the application process considerably. Again, you can check with the lender what documents you’ll need before you start your online application.

Consider a joint application or guarantor

If you’re not in the best position to get approved for a personal loan, you could opt for a joint application with your partner, or with a trusted family member or friend. Ideally, the person you choose will have excellent credit, a good income from steady employment, and would easily get approved for a personal loan in their own right.

An alternative option could see you asking that person to act as a guarantor on the loan.

Whether you opt for a joint application or ask someone to go guarantor on your loan, it’s worth bearing in mind what the agreement means to the other party. They are essentially guaranteeing the loan, agreeing to repay it should you fail to do so. To avoid damaging their credit – as well as your own – only apply for a loan you know you can repay, and be responsible with your repayments once approved.

Traps

Don’t exaggerate your financial situation

When you apply, you will be asked to provide detailed information regarding your finances. While it may be tempting to exaggerate your incomings or downplay your outgoings, it’s important to be accurate in the information you provide. Not only will you need to prove whatever information you provide, you could also end up in trouble if you stretch the truth.

First up, lying about your finances could be interpreted as fraud. Secondly, by lying about your financial situation, you are not providing an accurate representation of your ability to repay the loan. As a result, you could be approved for a loan you can’t afford, ultimately leading you into financial stress.

Don’t apply for more ‘just in case’

While it may be tempting to add a bit more to your loan amount, just in case, borrowing more than you need is generally not a good idea. With a higher loan amount, your repayments will either be higher or your loan will be longer. You will also pay more in interest on that higher amount.

Don’t underestimate how long the approvals process will take

Need money now? While some lenders offer same-day access to funds, others take days or even weeks to progress from application to drawdown. If you need money in a hurry, check the lender offers that as a service – and be aware, quicker turnarounds can come at a higher cost.

It’s also worth remembering that some loans, such as secured loans and loans for self-employed applicants tend to take longer to process.

Paying Off a Personal Loan

You’ve been approved. Congratulations! Now you’ve got access to those funds, it’s time to start paying back what you owe.

Tips

Set up a direct debit for your repayment

One of the first things to do when you get approved for a loan is set up a direct debit to cover your repayments. Some lenders ask for this as part of the application process, but if your lender didn’t, you can set up the direct debit after signing the loan contract.

By setting up a direct debit, you can make sure your repayments are made on time, every time. As long as you make sure you have the funds available in your account to cover each repayment, you can essentially forget about them.

Make extra payments when possible

If your loan allows for it, you may want to consider making extra repayments when you have money available in your budget. By making extra repayments you can ‘get ahead’ on your loan, to potentially pay it down faster. Doing this, you may be able to save on interest, while also enjoying access to your funds via redraw should you need it.

Your loan may allow you to make ad-hoc extra payments, or to pay more on your repayments on a regular basis.

Use your personal loan to build your credit

With the comprehensive credit reporting system that’s currently in place, both your positive and negative actions affect your credit score. Which is why, when you treat your personal loan responsibly, you can use it to build your credit and improve your credit score.

Traps

Don’t miss your repayments

Failing to make your repayments on time is a bad idea all round. First of all, it will likely result in you paying a late payment fee, which could reach up to $35 a pop. Paying out fees obviously makes it harder to pay down the loan, but it also doesn’t feel great. Who wants to pay out in fees when they don’t have to?

Secondly, there’s the effect paying late could have on your credit report. Repayments that are more than 14 days late will be recorded on your credit report as a late payment, dinging your credit score. Repayments of more than $150 that remain unpaid more than 60 days past their due date will be recorded as a default, lowering your credit score even further.

Avoid paying out high break costs

Before paying off your loan early or making extra repayments, check your loan won’t penalise you for doing so. Some loans allow you to make extra repayments up to a certain amount each year, after which point you will pay a fee. In terms of early payout, lenders may apply fees to loans paid out within the first one or two years, but no fees beyond that.

Make sure your efforts in paying off the loan early aren’t to your detriment. Huge break costs and early penalty fees could amount to more than you would save in interest paying off the loan over its agreed-upon term, in which case, weigh up which situation would be better for you.

Recognise when you’re feeling overwhelmed

Whether your situation has changed since you were approved, or you underestimated how the loan’s repayments would affect your budget, be aware of any financial stress developing as you repay the loan. Creating a stricter budget that cuts back on unnecessary expenses to free up more for repayments could be a solution worth looking into.

However, if you feel like you are in over your head and there’s nothing you can do to improve your situation, contact your lender to discuss the issue before you start missing repayments.

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