There will come a time in your life when you need to make a decision about whether or not to borrow money.
You may be a student needing some funds to complete your degree or perhaps you're considering going on a holiday or maybe you've moved out of home for the first time and need to buy household goods like furniture, a fridge and a washing machine.
The attitude towards debt has changed over the years and if managed properly, having a debt doesn't mean you put your life on hold in order to pay it back.
If you can pay back the full loan amount quickly, then a no-fuss solution may be to put it on your credit card, although you do need to be disciplined with this approach. If you're looking at paying it back over a longer period of time, consider taking out a personal loan. Visit our everyday finances section for more information on credit cards.
You can take out a personal loan from a wide range of banks and financial institutions, but the one you turn to will depend on what you want the money for and how quickly you can pay it back.
One of the most important things to do is to shop around. Rates and fees can differ substantially. And with the lenders so keen to sign you up, as long as you have a healthy credit rating (new window), it's a buyer's market for credit. This means that you will be able to pick and choose the loan you want to sign up for. For more about credit ratings and what you can do if you don't have a good one, visit MoneySmart's Credit scores page.
If you're currently having trouble managing your credit card debt, look at consolidating your debts with a personal loan to pay your debt off sooner and avoid the higher interest rate charge that your credit cards incur. Be aware that not all consolidation deals are beneficial - some simply bring all your debts under one loan. Always do your research and make sure you select a financial arrangement that best suits your particular circumstances.
The interest rate charged on a personal loan is usually less than that on credit cards. So if you are making a major purchase that you don't expect to pay off quickly, you are probably better off with a personal loan rather than using your credit card. That way you'll end up paying less interest.
Personal loans usually range from $3000 to about $30,000 and they're generally repaid over a period of one to seven years.
Things to look out for!
Have you shopped around at several banks and credit unions and looked at the interest rates? Half a percent may not seem much at a glance, but over the course of your loan, it could mean you have to pay hundreds more.
Do you have to pay for an establishment fee? These fees are usually between $40 and $200. (Establishment fees are not necessarily a bad thing as they might come with a lower interest rate. However, if your loan's only for a short period of time, the establishment fees can negate the benefit of the lower interest rate.)
Other considerations include:
- Are there any monthly fees?
- If you pay out your loan early, will you have to pay an early exit penalty?
No matter where you live in Australia, every credit transaction you make is covered by the Consumer Code of Credit.
The code sets the rules for how banks and credit providers give you information about their products and your obligations. Under the code, banks and lenders have to present information in a way that lets you compare products more easily.
Information must be given in a clear and easy to understand format, and they must tell you what your rights and obligations are, as well as any information about interest rates, fees or commissions that affect your contract.
Other ways of getting a personal loan
If you don't want to look for a personal loan on your own, you might want to use the services of a finance (or mortgage) broker.
Some Australians are turning to finance brokers to find loans that suit them. A finance broker acts as an agent between you and your loan provider.
Using a finance broker can save you time and money, but you need to realise that they are usually not giving impartial advice and they may not be experts in the credit market. Visit MoneySmart's Using a broker page for some tips and warnings.
It's wise to ask the broker a few questions before you meet. For example:
- Are you registered?
- How many credit providers and products do you check?
- Which credit providers do you have on your list of lenders?
- Does your commission vary between mortgage providers?
Changes to the contract
Your bank can change the contract, but only if the contract says so. So read the contract carefully to know what they can change. They must tell you about interest rate changes. But notice can be as late as the day on which the increase takes effect.
If the bank changes the way interest is calculated or applied, or a credit fee or charge is increased, they must give you at least 30 days notice.
Links for personal loans
Consumer Credit Code
Read all about the Consumer Credit Code that governs all credit transactions taking place in Australia.
Victoria Legal Aid
General legal information about loans.
Money Smart - Credit Cards
Great information here about credit cards, avoiding credit card debt and keeping your card safe from fraud.