When Should I Use a Personal Loan?

Personal loans are convenient because they generally only take about 1-3 business days to approve, as a result of fewer lending criteria than for home loans. Basically, they just want to be sure you have the financial capacity to pay back the loan.

You can apply for a personal loan for just about any purpose: a car, a computer, a holiday, fixing your car, doing renovations or paying for that elective surgery that will give you greater mobility. You may want to propose with a diamond ring, or pay your kids’ private school fees.

Personal loans can really help if you just need a bit of ready cash for a one-off expense. They are not usually suitable for on-going expenses. You can also use one to refinance an existing loan or to consolidate all your loans. Consolidation often makes financial sense because you only have to pay one set of fees, and you may be able to get a lower interest rate than you currently have.

Loan amounts may vary from lender to lender. Mortgage brokers can advise on you a range of lenders and loans to suit your needs. In general, you can borrow from $1,000 to around $35,000 without security. To calculate how much you can borrow, lenders use a formula. This may vary, but a rule of thumb is that your monthly repayments should not be greater than 35% of your income before tax, and no more than 30% of joint income with your partner. Before applying for a loan it is a good idea to use the lender’s loan calculator to make sure you are eligible for the loan.

The loan repayment term is usually 1 to 10 years, and you can negotiate terms to suit your needs and the repayments you can afford, which can be made, depending on the lender, weekly, fortnightly or monthly. Weekly repayments will allow you to pay the loan the most quickly.

You need to consider whether to get a personal loan with a fixed or variable interest rate.
Fixed rates will be higher, but variable rates could increase at any time. The great news is that you can usually increase your repayments, make more frequent repayments or a large lump-sum repayment, without incurring any financial penalties. This can help you to pay off the loan much quicker and save a lot of money in interest payments. Interest rates may be higher than for home loans, but the industry is very competitive, so rates vary from around 9-15%.

There may be a loan processing fee. You should consider a number of lenders and always check the fine print.

Summary

Personal loans can be useful when you need quickly get money for a one-off purpose such as:

• A new car.
• A diamond ring.
• A computer
• Fixing your car.
• Medical expenses such as an operation or a root canal.
• A holiday.
  

Advantages of personal loans:

• Unsecured.
• Fast approval.
• No financial penalties for more frequent repayments or lump-sum payments.

Disadvantage:

• Interest rates may be higher than for home loans, but this is offset by a very competitive industry.

Article correct at its author date: Dec 2006. Copyright Virtual Office Space, Any unauthorised reproduction of this article will be prosecuted to the full extent of the law. Credit Cards Australia.

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